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Old Mutual plc interim results for the half year ended 30 June 2014 - Part I
Old Mutual
ISIN CODE: GB00B77J0862
JSE SHARE CODE: OML
NSX SHARE CODE: OLM
ISSURE CODE: OLOML
NEWS RELEASE
Thursday, 07 August, 2014
Old Mutual plc interim results for the half year ended 30 June 2014
Good underlying financial performance*
- Adjusted operating profit of GBP761 million up 17% in constant currency, 5% lower in reported currency
- Net client cash flow of GBP1.6 billion, with improved flows in Q2 over Q1
- Funds under management of GBP300.5 billion up 5% in constant currency, 2% in reported currency (vs FY 2013)
- GBP391 million of free surplus generated (H1 2013: GBP460 million)
- Group RoE** of 13.2%, within target range of 12-15%
- Adjusted earnings per share of 8.8p up 16% in constant currency, down 5% in reported currency
- Interim dividend of 2.45p, up 17%
Further strategic and operational progress
Emerging Markets
- Strong South African performance with profit and gross sales up in all businesses
- New and innovative product roll-out in South Africa; strong H2 product pipeline for East and West Africa
- Agreed terms to acquire a further 25% of Old Mutual Finance for R1.1 billion
Old Mutual Wealth
- Excellent growth in gross sales; strong profit performance from OMGI
- Good progress in building vertically integrated wealth management business: integration of Intrinsic proceeding well
Nedbank
- Strong profit growth in all clusters with low defaults due to selective origination and risk management
- Capital position remains strong and well positioned for Basel III
Institutional Asset Management
- Business improvement for US-Based Affiliates continue: margins up and strong growth in management fees
- NCCF from US Affiliates of $2.6 billion
Group-wide
- Progress in identifying additional synergies of a pre-tax value of R1 billion between South African businesses
Julian Roberts, Group Chief Executive, commented:
"Against a difficult economic backdrop, our strong performance in the first half of the year, with constant currency profits up 17%,
demonstrates the strength of our Group and the ongoing execution of our strategy.
"While consumers in South Africa face a squeeze on disposable incomes, the good performance across the Group's businesses shows
that customers continue to trust us to guide them through the critical stages of their lives and financial choices. In all our African
markets, we are rolling out new product propositions to consumers across a range of income groups.
"In the UK, Old Mutual Wealth had a profitable half year and is making excellent progress in building a modern wealth management
business that will meet customer demand for innovative and flexible investment products. Recent regulatory changes in the UK are
profoundly altering industry dynamics and we believe these will benefit our business.
"While we expect the external conditions for our emerging markets businesses to continue to be challenging in the next six months,
particularly given the lower GDP growth expectation in South Africa, we will focus on what we do best: meeting the needs of our
customers through innovative, attractively priced and transparent investment, savings, insurance and banking products as well as
continually improving the operating efficiencies of our business. In common with groups that earn a significant proportion of their profits
from outside the UK, we expect the strength of Sterling to have an impact on our reported results."
* IFRS results are included on page 13
** Annualised based on H1 2014 core business IFRS AOP (post-tax) profits and average ordinary shareholders' equity
Old Mutual plc results for the half year ended 30 June 2014
Enquiries
External Communications
Patrick Bowes UK +44 20 7002 7440
Investor Relations
Dominic Lagan UK +44 20 7002 7190
Media
William Baldwin-Charles +44 20 7002 7133
+44 7834 524 833
Notes to the financial summary on the front page of this announcement
- All figures refer to core continuing operations. Core continuing operations exclude the results of the Bermuda business, which is
classified as non-core
- Constant currency figures are calculated by translating local currency prior period figures at the prevailing exchange rates for the
period under review
- All tables illustrate absolute value movements irrespective of the signage.
Cautionary statement
This announcement contains forward-looking statements relating to certain of Old Mutual plc's plans and its current goals and
expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk
and uncertainty because they relate to future events and circumstances that are beyond Old Mutual plc's control, including, among other
things, global, UK and South African domestic, economic and business conditions, market-related risks such as fluctuations in interest
rates and exchange rates, policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing and
impact of other uncertainties, future acquisitions or combinations within relevant industries, as well as the impact of tax and other
legislation and regulations in territories where Old Mutual plc or its affiliates operate.
As a result, Old Mutual plc's actual future financial condition, performance and results may differ materially from the plans, goals and
expectations set out in its forward-looking statements. Old Mutual plc undertakes no obligation to update any forward-looking
statements contained in this announcement or any other forward-looking statements that it may make.
Nothing in this news release shall constitute an offer to sell or the solicitation of an offer to buy securities.
Notes to editors
A webcast of the presentation on the interim results and Q&A will be broadcast live at 12:00 pm UK time (1:00 pm South African time)
today on the Company's website www.oldmutual.com. Analysts and investors who wish to participate in the call should dial the following
numbers and quote the pass-code 32332170#:
UK/International +44 20 3139 4830
US +1 718 873 9077
South Africa +27 21 672 4008
Playback (available for 30 days from Thursday, 7 August 2014), using pass-code 649682#:
UK/International +44 20 3426 2807
Copies of these results, together with high-resolution images and biographical details of the executive directors of Old Mutual plc, are
available in electronic format to download from the Company's website at www.oldmutual.com.
A Financial Disclosure Supplement relating to the Company's interim results can be found on our website. This contains financial data
for 2014 and 2013.
Sterling exchange rates
Appreciation /
(depreciation)
H1 2014 H1 2013 of local currency
Average Rate 17.85 14.23 (25)%
South African Rand
Closing Rate 18.18 15.08 (21)%
Average Rate 1.67 1.54 (8)%
US Dollar
Closing Rate 1.71 1.52 (13)%
Part 1 – 2014 Interim Review
Contents
News Release 1
Part 1 – 2014 Interim Review 3
Group Review 4
Overview 4
Business review 4
Board changes 6
Outlook 6
Part 2 – Financial Performance 7
Part 3 – Detailed Business Review 15
Part 4 – Financial Information 39
Part 1 – Interim Review
Group Review
H1 2013 H1 2013
(constant (as GBPm
Group highlights(1) H1 2014 currency) change reported) change
Adjusted operating profit (IFRS basis, pre-tax) 761 652 17% 801 (5)%
Adjusted operating earnings per share (IFRS basis) 8.8p 7.6p 16% 9.3p (5)%
Group net margin(2) 45bps 44bps 1bp 49bps (4)bps
Return on equity(3) 13.2% 13.7% (50)bps
Net asset value per share (4)(5) 133.3p 134.2p (1)% 137.7p (3)%
Net client cash flow (GBPbn) 1.6 8.3 9.1
Funds under management (GBPbn) (4) 300.5 286.5 5% 293.8 2%
Interim dividend for the year 2.45p 2.10p 17%
(1) The figures in the table are in respect of core continuing businesses only
(2) Ratio of AOP before tax on an annualised basis to average funds under management in the period
(3) RoE is calculated as core business IFRS AOP (post-tax) on an annualised basis divided by average ordinary shareholders' equity (i.e. excluding the
perpetual preferred callable securities)
(4) Comparative information for NAV per share and FUM is presented as at 31 December 2013
(5) Net asset value per share is calculated as ordinary shareholders' equity (i.e. excluding the perpetual preferred callable securities) divided by the actual
shares in issue at the end of the period
Overview
Mixed external macro-economic conditions
In our main market of South Africa, the economy remained fragile in the first half of the year with GDP contracting in the first quarter by
0.6% on a seasonally adjusted basis, having risen 3.8% in Q4 2013. The five month mining strike was resolved in late June, only to be
followed days later by strikes in the metal working sector, although this was resolved in July. Rising inflationary pressure and a 50 bps
interest rate rise in January 2014 have led to increasing strain on consumers. In July, the South African Reserve Bank raised rates
further by 25 bps and downgraded GDP growth estimates for 2014 to 1.7%. While growth has been subdued, the JSE has performed
strongly. The Rand weakened by 4% from the start of the year, with the average rate against Sterling at R17.85 which is 25% weaker
than in H1 2013, impacting on our reported results.
In the UK, the economy continues to improve with GDP growth for the year estimated at 3.2%, with the economy now larger than it was
at pre-financial crisis levels in 2008. With the number of people in employment rising to record levels, year-on-year inflation of 1.9% in
June and a buoyant housing market, expectations of a rate rise later in the year, or early next year, are growing. In the US, growth
continues, although the IMF has reduced its forecast GDP to 1.7% for the year, equity markets are rising and unemployment is at its
lowest level since September 2008. Against Sterling, the average Dollar exchange rate declined 8% in the half.
During the period, the FTSE 100 Index was broadly flat, but there was growth in the US and South African equity markets, with the S&P
500 and the JSE All-Share index rising by 6% and 10% respectively.
Group performance remains strong
Despite the complex external environment, Old Mutual performed well in the first half of the year, with growth in adjusted operating profit
(AOP) on an IFRS basis of 17%, in constant currency, to GBP761 million. The Group's free surplus generation was GBP391 million,
against GBP460 million in the comparative period.
Across the Group, we recorded net client cash flows (NCCF) of GBP1.6 billion, which although down on the strong comparative period
showed a marked improvement in the second quarter. Funds under management (FUM) stood at GBP300.5 billion, up 5% since 31
December 2013 on a constant currency basis, and up 2% in reported currency. Adverse currency movements to FUM in the period were
almost GBP8 billion and the gain from the rise in equity markets was around GBP14 billion.
Group net margin decreased by 4 basis points from 49 points to 45 points mainly due to the impact of exchange rates. Core Group RoE
was 13.2%, against 13.7% in H1 2013, with lower reported AOP and reduced average equity.
The interim dividend of 2.45p, or its equivalent in local currency for shareholders on the company's overseas registers, represents an
increase of 17% from the prior year.
Business review
A strong performance in Emerging Markets, despite challenging conditions in South Africa
Emerging Markets had an excellent half with profits up 22% on H1 2013, mainly due to higher asset-based fees. Gross sales grew 13%
to R85.8 billion, driven by a strong performance in South Africa. NCCF at R9.2 billion was down compared to R11.1 billion in H1 2013,
mainly due to lower asset management net inflows in South Africa, Colombia and Namibia. FUM increased to R876.5 billion due to the
positive client flows and the continued strong equity market performance.
In South Africa, Retail Affluent's profits increased by 24% and its gross sales grew by 21%, due to the continued popularity of XtraMAX
which was introduced in May 2013, and the positive reception to the launch of our Wealth offering which has seen R3.1 billion of net
flows in the first half of the year.
Corporate recorded covered APE sales 35% higher than 2013, with regular premium sales up 225% with excellent group assurance and
Evergreen sales. We launched the new Corporate Superfund umbrella on 1 June which should greatly enhance the customer
experience and further extend our market lead.
In Mass Foundation, gross sales were up 13%, despite the implementation of stricter acceptance processes. Life APE sales for the first
half were flat against a very strong comparator in 2013, although Q2 saw a 15% increase against Q1. We have implemented new
technology for the sales force, and increased adviser numbers, but productivity is not yet at the levels we expect. We are implementing
measures to address this. We are launching a new savings product in Mass Foundation in Q3, called 2-in-ONE. This innovative new
product will allow customers to access a portion of their savings in a way that will not attract surrender charges.
Old Mutual Investment Group (OMIG) had a good six months with non-covered sales at R14.6 billion up 6%, with large mandates
secured in the Liability Driven Investments boutique although the substantial inflows in Futuregrowth, a fixed income boutique, in the
prior year not being repeated.
In the Rest of Africa, APE sales increased by 13% on a like-for-like basis. Progress in East Africa is promising: we have expanded our
retail mass distribution network, providing traction in this market. Faulu has been granted a licence by the local regulator to sell life
products and we will look to sell our suite of Retail Mass products into the existing Faulu customers. In West Africa, we signed a
bancassurance deal with Ecobank in Ghana and we will be rolling out a full retail mass proposition in Nigeria in Q3 2014. We have
identified 20 Ecobank branches in Nigeria for the pilot phase of retail bancassurance distribution. In Nigeria, we have underwritten a
Group Life scheme for 300,000 members of the Nigerian Armed Forces. In Asia and Latin America, profits were up 24% supported by
organic growth, exchange rate movements and good performance from AIVA. A good performance in the Mexican affluent market and
the inclusion of the India corporate business for the first time drove an increase in life sales of 21%.
The operational improvement in Property & Casualty (P&C) which we first noted in Q1 has continued, although a substantial amount of
work remains to be done. Despite pricing and selective underwriting, P&C saw strong premium growth of 12%, and the net underwriting
margin of (1.0)% comparing favourably to that of the first half of 2013 at (2.7)%. The loss this half was primarily due to an increase in
losses experienced in our Credit Guarantee business. We have seen positive results from our claims cost management and changing
our pricing strategy in Personal Lines and the effective management of capital. The management team remains focused on delivering a
sustainable turnaround and are making good progress in execution.
The integration of the P&C operation into the wider Emerging Markets business continues and operations in the rest of Africa will be
trading under the Old Mutual brand by the end of August 2014.
Nedbank maintains its momentum with profit growth in all clusters
Nedbank had a strong six months with headline earnings up 18% to R4.6 billion. This performance was underpinned by net interest
income growth of 9.3% to R11,263 million and our focus on selective asset origination and excellent risk management enabled the
credit loss ratio to improve to 83 basis points. Non-interest revenue (NIR) decreased to R9,480 million (June 2013: R9,535 million) as a
result of fair-value movements together with the outcomes of our strategic choices, the base effect of specific one-off items in the 2013
comparative period and a general slowdown in client transactional activity in the challenging consumer environment. Excluding
movements in fair value, NIR increased 0.8%.
During the period, Nedbank completed the acquisition of a 36.4% stake in Banco Unico of Mozambique, with the conditions of purchase
setting out an agreed pathway to control. Nedbank has until 25 November 2014 to make a decision on whether to exercise its right to
acquire up to 20% in Ecobank Transnational Incorporated.
Strong profit growth at Old Mutual Wealth; now well positioned for the new UK retail financial services market
Old Mutual Wealth had a robust first half of the year, with profits up 11% to GBP120 million, notwithstanding the GBP7 million impact of
the strengthening of Sterling against the US Dollar and Euro. Gross sales for the half were up 15% on the comparative period at
GBP7.7 billion, with very strong performances by Old Mutual Global Investors, up 29% to GBP4.5 billion, and the UK Platform with sales
of GBP2.5 billion.
International sales were 4% lower at GBP892 million, with improved performance in the UK, Latin America and South Africa but lower
sales in the Far East. In July we launched Silk Life Plan, an industry-leading investment product in Asia targeted at private banking
customers and distributed by Jardine Lloyd Thompson (JLT).
NCCF for the half was GBP1.2 billion, up 50%, with UK Platform sales from both new business and internal transfers into OMGI of
GBP775 million, accounting for 31% of all Platform sales. OMGI saw institutional outflows via UK third party channels in Q2, including a
loss of a GBP248 million segregated mandate and a further GBP153 million outflow from the divested Nordic business. Platform and
other UK outflows increased with a heightened level of re-registrations. FUM was up 2% to GBP80.3 billion, due to a combination of
client flows and market appreciation, although offset by currency movements on non-Sterling assets. The UK Platform now has
GBP28.8 billion of FUM, up 5% from 31 December 2013, and recorded a profit of GBP10 million for the half due to economies of scale
and a continued focus on expense management.
OMGI delivered strong profits of GBP16 million, 100% higher than prior period (H1 2013: GBP8 million) with an improvement in
operating margin to 28%. We have seen strong net inflows to our higher margin Alternatives and Equities desks with some sector
rotation out of lower margin sub-advised funds. OMGI was named as “Global Group of the Year” in the 2014 Investment Week Fund
Manager of the Year awards. OMGI is now on all major distribution platforms and we continue to review the funds available to enhance
the proposition and offer financial advisers and customers access to the best fund managers at a highly competitive price.
We have made significant progress in creating a vertically integrated wealth management business. We are progressing well with the
integration of Intrinsic into Old Mutual Wealth following completion of the acquisition on 1 July 2014. Integration costs are expected to be
incurred in the second half of the year. Additionally, we have announced that we intend to acquire the remaining 50% stake of Cirilium,
the core investment proposition for Intrinsic's restricted financial advisers. Progress continues with the implementation of the IFDS
contract, due to be rolled out in 2016. We will be rebranding the Skandia UK business as Old Mutual Wealth in the second half of 2014.
We launched WealthSelect in the UK in February 2014 and it now has over GBP1.0 billion FUM with net inflows of GBP160 million in
the first half of the year and a further GBP65 million of net inflows in July, with the majority of customers choosing the Managed Portfolio
Service (MPS). The UK Government announced significant changes to the UK pension system in March. We believe these changes will
benefit our business model. Demand for flexible drawdown products has risen considerably although we expect customers and advisers
to wait for regulatory certainty before reacting to the new pension regime.
During the period we completed the sale of Skandia Poland to Vienna Insurance Group and agreed the sale of Skandia Germany and
Skandia Austria to Heidelberger Leben Group, with completion expected in the second half of 2014. The aggregate consideration for
Skandia Germany and Austria is EUR220 million with a prospective reduction in 2015 of AOP from the disposed businesses of
GBP35 million, the remaining businesses are consequently now targeting profits of GBP270 million by 2015.
Institutional Asset Management improves profits due to increased management fees
Institutional Asset Management grew profits by 8% to $91 million in the first half of the year as higher market levels meant our US-based
affiliates earned increased management fees. NCCF for Institutional Asset Management for the first half was negative, primarily due to
outflows in global fixed income strategies, although the second quarter saw positive NCCF. The US-Based Affiliates captured $2.6
billion of NCCF in the half. Total outflows of $1.3 billion included $0.9 billion related to investment driven hard asset disposals by
Heitman, a real estate manager. Despite the outflows, we expect overall flows to result in an $8.5 million positive impact to annualised
revenues with the concentration of inflows into higher fee products.
Our US based affiliates' aggregate investment performance is reported as weighted by the revenue generated by its products.
As of 30June 2014, assets representing 70%, 73%, and 75% of revenue outperformed benchmarks over the one-, three- and five-year periods
(31 March 2014: 77%, 93%, and 68%).
On 30 June 2014, we announced that we had formed a new holding company for our US-based institutional asset management
business, OM Asset Management Limited (OMAM). Rogge Global Partners, a global fixed income manager based in London, will not
form part of OMAM and will report into Old Mutual plc. Rogge's 2014 AOP result is expected to be approximately break-even.
And at all times, we strive to be a responsible business
In our strategy that was articulated in March 2014, we stated that we wanted to become the recognised financial services leader in
responsible business in each of the markets where we operate. We will focus on five pillars of responsibility: customers; investment;
employees; communities; and environmental management. We have appointed Gail Klintworth, formerly Chief Sustainability Officer of
Unilever, as Group Customer Director and Gail will have specific responsibility to ensure we deliver on this strategic objective. We
expect the pace of movement in this area to increase.
Our strong cash generation and capital position supports a 17% increase in the interim dividend
In line with our dividend policy, the Board is declaring an interim ordinary dividend per share of 2.45 pence, this being 30% of the prior
year's total dividend and a 17% increase on the 2013 interim dividend payment. Our capital position remains strong, with a Financial
Groups Directive (FGD) surplus of GBP2.0 billion representing a coverage ratio of 164%. Our net debt increased to GBP0.9 billion
compared to GBP0.7 billion at the end of 2013 due to a small decrease in liquid assets following payment of the 2013 final dividend and
fair value movements in debt.
Looking ahead, our continued strong cash generation and the successful execution of our corporate finance transactions will give us
significant financial flexibility. It will provide a suitable buffer against the core capital requirement, investing for growth as well as
acquisition opportunities in line with our strategy. Taking into account these requirements and opportunities, we continually review the
potential uses of our capital for optimal balance sheet efficiency and RoE.
Board changes
As previously announced, Ingrid Johnson has joined as Group Finance Director and Paul Hanratty has been appointed Chief Operating
Officer.
Outlook
While we expect the external conditions for our emerging markets businesses to continue to be challenging in the next six months,
particularly given the lower GDP growth expectation in South Africa, we will focus on what we do best: meeting the needs of our
customers through innovative, attractively priced and transparent investment, savings, insurance and banking products as well as
continually improving the operating efficiencies of our business. In common with many businesses that earn a significant proportion of
their profits from outside the UK, we expect the strength of Sterling to have an impact on our reported results.
We continue to explore opportunities to expand our business in Africa through investing for growth both organically and inorganically.
The continuing changes in the UK savings market following RDR and the Government's announcement on pension reforms in March
increase the attractiveness of the UK as a place to invest. We shall evaluate whether we can achieve faster growth through acquisitions
to complement our existing vertically integrated wealth management business.
Part 2 – Financial Performance
Contents
News Release 1
Part 1 – 2014 Interim Review 3
Part 2 – Financial Performance 7
Financial Review 8
AOP analysis 8
Tax 8
Total tax expense 8
Income tax attributable to policyholder returns 8
Tax uncertainties 9
Reconciliation of IFRS profit after tax to Adjusted Operating profit after tax 9
Group and subsidiary RoE 9
Free surplus generation 9
Cash and liquidity 9
Liquidity 9
Net capital flows 10
Receipts from subsidiary operations to holding company 10
Payments by holding company 10
Capital and leverage 10
Debt strategy, profile and maturities 10
Financial strength rating 10
Financial Groups Directive solvency results 11
Business local statutory capital cover 11
Interim dividend 11
Other economic impacts 11
Adjusted Group MCEV 11
Risk management 12
Risks and uncertainties 12
Financial Appendix 13
Supplementary financial information (data tables) 13
Summarised financial information 13
Group return on equity 13
Group debt summary 13
Financial Groups Directive 13
Regulatory capital 13
Financial strength rating 14
Part 3 – Detailed Business Review 15
Part 4 – Financial Information 39
Financial Review
AOP analysis
GBPm
% change
H1 2013 % change (constant
H1 2014 (reported) (reported) currency)
Core operations
Emerging Markets(1) 291 300 (3)% 22%
Nedbank 361 387 (7)% 17%
Old Mutual Wealth 120 108 11% 11%
Institutional Asset Management 54 54 - 8%
826 849 (3)% 17%
Finance costs (41) (46) (11)% (8)%
Long-term investment return on excess assets 13 25 (48)% (35)%
Net interest payable to non-core operations (2) (6) (67)% (67)%
Corporate costs (25) (21) 19% 19%
Other net expenses (10) - - -
Adjusted operating profit before tax 761 801 (5)% 17%
Tax on adjusted operating profit (202) (207) (2)% 19%
Adjusted operating profit after tax 559 594 (6)% 16%
Non-controlling interests – ordinary shares (126) (137) (8)% 15%
Non-controlling interests – preferred securities (9) (9) - 25%
Adjusted operating profit after tax attributable to ordinary equity holders
of the parent 424 448 (5)% 16%
Adjusted weighted average number of shares (millions) 4,840 4,835 - -
Adjusted operating earnings per share (pence) 8.8 9.3 (5)% 16%
(1)Comparative has been restated to include Property & Casualty AOP of GBP10 million
Reported Emerging Markets and Nedbank AOP reduced, reflecting exchange rate movements despite local currency growth. Old
Mutual Wealth profits rose on higher fee income and lower expenses. Institutional Asset Management profits were flat largely due to
exchange rate movements, but also lower profit from our non-US based affiliate.
Finance costs were down by 11%, given the lower level of international debt in the period. LTIR earnings were lower given exchange
rate movements and reduced levels of excess assets in Emerging Markets given acquisitions since H1 2013. Net interest payable to
non-core operations reduced, given the redemption of the Bermudan inter-company loan notes. Other net expenses reflected higher
IFRS 2 share incentive charges and rebranding costs without the offsetting gains experienced in the prior year.
Further information on the Group's non-core business (Bermuda) is included in Part 3 – Detailed Business Review.
IFRS adjusted operating profit after tax attributable to ordinary equity holders of the parent decreased by 5% on a reported basis.
Adjusted operating earnings per share also reduced by 5% on a reported basis.
Tax
Total tax expense
The AOP effective tax rate (ETR) for the Group has increased slightly to 27% (H1 2013: 26%). As over 85% of the H1 2014 AOP tax
charge relates to Emerging Markets and Nedbank, movements in these business units have a correspondingly large impact on the
Group's ETR. The increase in the ETR was mostly incurred at OMEM which saw an increase in the tax rate on its long-term
investment returns and a lower level of untaxed income. This was partly offset by a reduction in ETR at Nedbank.
Looking forward, and depending on market conditions and profit mix, we expect the ETR on AOP in future periods to range between
25% and 28%.
Income tax attributable to policyholder returns
In accordance with accounting guidance, tax on policyholder investment returns is included in the Group's IFRS tax charge rather than
being offset against the related income. The impact is to increase Group IFRS profit before tax by GBP44 million in H1 2014 (H1 2013:
GBP71 million), with a corresponding increase to the tax charge. Of this GBP44 million, GBP6 million was attributable to Old Mutual
Wealth (H1 2013: GBP49 million), with the remaining GBP38 million relating to South Africa and Rest of Africa (H1 2013: GBP22
million). Income tax attributable to policyholder returns is excluded from the AOP calculation.
Tax uncertainties
The Group is regularly in discussion with the respective tax authorities in each of the jurisdictions where the Group is active. The Group
applies its judgement to determine if a provision for future tax uncertainties should be recognised based on detailed reviews of any
potential exposure to tax authorities and the assessment of the most probable outcome of the tax uncertainty. As these provisions are
based on estimates and rely on judgements made by the Group, the actual amount of future taxes paid by the Group could be different
to the amounts provided.
Reconciliation of IFRS profit after tax to Adjusted Operating profit after tax
IFRS profit after tax was GBP336 million (H1 2013: GBP547 million), with GBP215 million of adjusting items post-tax and non-
controlling interests. Adjustments include GBP125 million relating to the write down of goodwill and intangibles as a result of the
prospective sales of Skandia Austria and Germany, GBP39 million of credit spread movements, tax and net other movements of GBP51
million. Adjusting operating profit after tax was GBP559 million (H1 2013: GBP594 million).
Group and subsidiary return on equity
Core Group RoE was 13.2% (H1 2013: 13.7%) with lower Sterling reported earnings partially offset by lower equity given the impact of
foreign exchange translation on the Group balance sheet and the Group dividends paid. The Group continues to target RoE in the range
of 12-15%.
Group RoE (annualised basis) H1 2014 H1 2013
Emerging Markets(1)(2)(3) 23.6% 21.4%
Nedbank(4) 16.5% 16.1%
Old Mutual Wealth(5) 16.9% 15.3%
Institutional Asset Management(3) 17.3% 15.1%
Group RoE(6) 13.2% 13.7%
(1)Within Emerging Markets, OMSA, Rest of Africa and Asia are calculated as return on allocated capital and Latin America is calculated as return on average
equity
(2)Emerging Markets now includes Property & Casualty. Comparatives have been restated
(3)RoE for Property & Casualty and Institutional Asset Management calculated as IFRS AOP (post tax and NCI) divided by average shareholders' equity
(4)Headline earnings divided by daily average equity, excluding goodwill
(5)IFRS AOP (post tax) divided by average shareholders' equity, excluding goodwill, PVIF and other acquired intangibles
(6)Group RoE is calculated as IFRS AOP (post-tax) divided by average ordinary shareholders' equity (i.e. excluding the perpetual preferred callable
securities). It excludes non-core operations
At a local business unit level, RoE increased in Emerging Markets, Nedbank and Old Mutual Wealth with higher profits offsetting higher
equity bases. The RoE for Institutional Asset Management increased due to higher profits and a reduction in the capital base following a
reallocation of seed capital.
Free surplus generation
Our businesses have continued to be efficient at converting profit into free surplus, with a 81% conversion rate (H1 2013: 93%) and a
total free surplus of GBP391 million generated in the period (H1 2013: GBP460 million) by the business units after tax and non-
controlling interests. The reduction from H1 2013 was largely at Old Mutual Wealth as a result of costs associated with the IFDS
outsourcing project, Nordic legacy costs, the non-recurrence of a reinsurance receipt in the prior year and lower cash from investment
returns. From the free surplus generated, GBP241 million of cash was remitted by the operating units to the Group holding company
during H1 2014.
Cash and liquidity
Liquidity
At 30 June 2014, the Group had available liquid assets and undrawn committed facilities of GBP1.3 billion (31 Dec 2013: GBP1.3
billion).
In addition to cash and available resources held at the holding company level, each individual business also maintains liquidity sufficient
to support their normal trading operations.
Part 2 – Financial Performance
The cash flows of the Group holding company are shown below.
GBPm
Opening cash and liquid assets at 1 January 2014 545
Net capital flows 16
Receipts from subsidiary operations
Operational receipts from northern hemisphere businesses 61
Operational receipts from emerging markets businesses 180
Total receipts 241
Payments
Interest paid (33)
Group Head Office costs (25)
Other operational flows 7
Ordinary cash dividends (2013 final dividend) (285)
Total payments (336)
Closing cash and liquid assets at 30 June 2014 466
Net capital flows
The holding company received capital flows from the sale of the business in Poland, recycling of seed capital investments and additional
deferred proceeds in relation to the transfer of the Chinese joint venture to Emerging Markets. Funding was provided by the holding
company to Old Mutual Wealth for the acquisition of Intrinsic and to Old Mutual Bermuda, to support the expected run-off of the book.
Receipts from subsidiary operations to holding company
The remittances to the holding company on a cash-paid basis were GBP241 million in H1 2014. The holding company has received
GBP180 million of operational flows from the emerging markets businesses, GBP60 million from Institutional Asset Management and
GBP1 million from Old Mutual Wealth.
Payments by holding company
Interest paid represents the cash cost of servicing the holding company's debt instruments and was GBP33 million for H1 2014 (H1
2013: GBP38 million).
Dividend payments to shareholders of GBP285 million were made, of which GBP152 million was paid to shareholders in Southern
Africa.
Capital and leverage
The Group's balance sheet remains strong.
The Group excluding Nedbank had gross debt of GBP1,379 million at 30 June 2014 (31 Dec 2013: GBP1,342 million).
Looking ahead, our continued strong cash generation and the successful execution of our corporate finance transactions will give us
significant financial flexibility. It will provide a suitable buffer against the core capital requirement, investing for growth as well as
acquisition opportunities in line with our strategy. Taking into account these requirements and opportunities, we continually review the
potential uses of our capital for optimal balance sheet efficiency and RoE.
Debt strategy, profile and maturities
The Group has first calls on debt instruments amounting to R3,000 million (GBP165 million) in October 2015, EUR374 million (GBP299
million) in November 2015 and GBP273 million in March 2020. In addition, the Group has GBP112 million of senior debt maturing in
October 2016 and GBP500 million of Tier 2 debt maturing in June 2021. The Group continues to explore capital market opportunities in
the South African debt markets.
Financial strength rating
In June 2014, S&P and Fitch both announced rating actions on SA Sovereign debt as a result of recent deterioration in GDP growth
from 3.8% (Q4 2013) to (0.6)% (Q1 2014). S&P lowered the long-term foreign currency rating to BBB- with a stable outlook; and Fitch
affirmed its long-term foreign currency rating as BBB but revised the outlook to negative from stable.
Fitch also announced the result of its review of Old Mutual plc and subsidiaries, triggered by its rating action on SA Sovereign debt.
Fitch affirmed the ratings of Old Mutual plc, OMLAC(SA) and Skandia Life Assurance Company and left all the ratings on stable outlook.
In July 2014, Fitch published a rating of Mutual & Federal, assigning a National Insurer Financial Strength rating of AAA(zaf) with stable
outlook. This rating reflected Fitch's view that Mutual & Federal is a core part of the Group and therefore benefits from the financial
strength of OMLAC(SA).
Financial Groups Directive solvency result
The Group's regulatory capital surplus, calculated under the EU Financial Groups Directive, was GBP2.0 billion at 30 June 2014 (31
December 2013: GBP2.1 billion) and this represents a statutory cover of 164%. The reduction in surplus and coverage ratio follows the
payment of the 2013 final dividend and a decrease in Nedbank's contribution to FGD as a result of an increase in its capital
requirement.
Nedbank is moving towards Basel III compliance and there will be an annual reduction in qualifying capital resources as a result. Capital
requirements were approximately GBP50 million higher due to increased charges on risk-weighted assets for H1 2014. Further
increases in the capital requirement will be a function of growth in risk weighted assets.
The FGD surplus is a level with which we are comfortable given our earnings, our cash flow profile, the natural currency hedges of our
capital resources and requirements and risk assessment. A 1% fall in the ZAR/GBP exchange rate would result in a GBP12 million
reduction in the surplus (2013: GBP13 million reduction in the surplus). Given that the capital resources and the capital requirement
both fluctuate with changes in exchange rates, the cover ratio remains broadly unaffected by such a change in currency rates.
We are well positioned for the implementation of Solvency II and Solvency Assessment and Management (SAM), in South Africa. We
recognise however, that the regulations are still evolving and therefore, in common with the rest of the market, we continue to
experience a degree of uncertainty.
Business local statutory solvency measures
The Group's subsidiary businesses continue to have strong local statutory capital cover.
30-Jun-14 31-Dec-13
Old Mutual Life Assurance Company SA (OMLAC(SA))(1) 3.2x 3.2x
Mutual & Federal(1) 1.5x 1.9x
UK(1) 3.1x 2.6x
Nedbank(2) Common equity Tier 1: 12.1% 12.5%
Tier 1: 13.1% 13.6%
Total : 15.0% 15.7%
Bermuda(3) 1.5x 1.4x
(1)The published result at 31 December 2013 was based on an estimate
(2)This includes unappropriated profits and is calculated on a Basel III basis
(3)Based on Bermuda's insurance (Prudential Standards) Class E Capital Rules
Interim dividend
The interim dividend of 2.45 pence, or its equivalent in local currency for those shareholders on overseas registers, represents an
increase of 17% on the prior year.
The interim dividend will be paid on 31 October 2014. A separate announcement of the key dividend dates is made with these interim
results.
Other economic impacts
South African long-term interest rates moved significantly during the course of H1 2014, with the 10-year government bond yield used
as the Financial Soundness Valuation (FSV) rate rising with global macro condition changes to close at 8.4%, up on the 2013 year end
level of 8.1%.
In order to manage the risk of a volatile FSV interest rate and its consequent impact on IFRS profits, Emerging Markets has a hedging
programme in place. The hedge programme has been continued into H1 2014, but will be reviewed during the year given developments
in economic conditions and the prevailing interest rate environment.
Adjusted Group MCEV
As we announced previously, given the change in strategic direction of Old Mutual Wealth's business towards asset management, we
will no longer be reporting MCEV information for this business. For the 2014 interim results, we have provided supplementary
information which includes a closing MCEV position for Old Mutual Wealth. This information at a Group level is reported in the 'MCEV
information' schedule shown on pages 92-94. Based on this analysis, the Adjusted Group MCEV per share as at 30 June 2014 was
205.4p (30 June 2013: 209.7p; 31 December 2013: 207.5p).
We will continue to provide full MCEV disclosure for the covered business in Emerging Markets in Rand and this can be found in the
supplementary information on the Investor Relations section of the Group website.
Risk Management
Risks and uncertainties
A number of potential risks and uncertainties could have a material impact on the Group's performance and cause actual results to differ
materially from expected and historical results.
The Group's overall risk profile and capital position remains stable. The Group's principal risks were largely unchanged during 2014.
Consequently, the most significant external risk to earnings relates to the concentration of businesses in South Africa and the exposure
to South African economic conditions and the impact thereof on our South African customer base, as well as the value of the Group's
earnings and assets when translated from Rand to Sterling.
Further discussion of these risks and the process by which the Group routinely assesses and responds to the changing risk environment
was provided in the 2013 Annual Report and Accounts. This is also available on the Investor Relations section of the Group website.
The Board believes that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly,
the Board continues to adopt the going concern basis for preparing accounts.
FINANCIAL APPENDIX
Supplementary financial information (data tables)
Summarised financial information
H1 2014 H1 2013 % change
IFRS results
Basic earnings per share 4.5p 8.9p (49)%
IFRS profit after tax attributable to equity holders of the parent (GBPm) 213 414 (49)%
Net asset value (GBPm)(1) 8,871 9,037 (2)%
Net asset value per share(1)(2) 133.3p 137.7p (3)%
(1)Comparative information for NAV and NAV per share is presented as at 31 cember 2013
(2)Net asset value per share is calculated as ordinary shareholders' equity (i.e. excluding the perpetual preferred callable securities) divided by the actual
shares in issue at the end of the period
Group return on equity(1) GBPm
H1 2014 H1 2013
AOP excluding accrued hybrid dividends – core operations 424 448
Opening shareholders' equity excluding hybrid capital – core operations 6,529 6,566
Half-year shareholders' equity excluding hybrid capital – core operations 6,315 6,480
Average shareholders' equity – core operations 6,422 6,523
Return on average equity 13.2% 13.7%
(1)Group RoE is calculated as IFRS AOP (post-tax) divided by average ordinary shareholders' equity (i.e. excluding the perpetual preferred callable
securities). It excludes non-core operations
Group debt summary
H1 2014 2013
Senior gearing (net of holding company cash) – IFRS basis (3.6%) (4.4%)
Total gearing (net of holding company cash) – IFRS basis 8.8% 7.6%
Book value of debt - MCEV basis (GBPm) 1,464 1,420
Book value of debt - IFRS basis (GBPm) 1,379 1,342
Total interest cover(1) 15.3 times 14.4 times
Hard interest cover(1) 4.6 times 4.2 times
(1)Total interest cover and hard interest cover ratios exclude non-core operations
Financial Groups Directive
Regulatory capital 30-Jun-2014(1) 31-Dec-2013(2)
GBPbn % GBPbn %
Ordinary Equity 4.7 92% 4.8 92%
Other Tier 1 Equity 0.4 8% 0.4 8%
Tier 1 Capital 5.1 100% 5.2 100%
Tier 2 Capital 1.1 22% 1.2 23%
Deductions from total capital (1.1) (22)% (1.2) (23)%
Total capital resources 5.1 100% 5.2 100%
Total capital requirements 3.1 3.1 1
Group FGD surplus 2.0 2.1 1
Coverage ratio 164% 168% %
(1)Based on the preliminary estimates. Formal filing due to the PRA by 30 September 2014
(2)As submitted to the Prudential Regulatory Authority (PRA) on 30 April 2014
The Group's FGD surplus is calculated using the 'deduction and aggregation' method, which determines the Group's capital resources
less the Group's capital resources requirement. Group capital resources is the sum of all the business units' net capital resources,
calculated as each business unit's stand-alone capital resources less the book value of the Group's investment; the Group capital
resources requirement is the sum of all the business units' capital requirements. Both the capital resources and the capital requirements
fluctuate with changes in exchange rates.
The Group's FGD regulatory capital is calculated in line with the PRA's prudential guidelines.
Financial strength rating
Moody's Fitch
Republic of South Africa
Sovereign rating Baa1 (neg) BBB (neg)
Old Mutual plc
Senior debt rating Baa2 (neg) BBB-
LT2 debt rating Baa3 (neg) BB
UT2 debt rating Baa3 (neg) BB
T1 debt rating Ba1 (neg) BB
Short-term debt rating P2 F3
OMLACSA
National insurance financial strength AAA
National long-term rating AAA
National long-term subordinated debt rating AA
Global insurance financial strength A3 (neg)
Skandia Life Assurance Company
Insurance financial strength A2 A-
Nedbank Limited
Foreign long-term rating Baa1 (neg) BBB (neg)
Mutual & Federal Insurance Company Limited
National insurance financial strength (July 2014) AAA
Ratings outlook are stable unless stated otherwise; neg = negative outlook
Part 3 – Detailed Business Review
Contents
News Release 1
Part 1 – 2014 Interim Review 3
Part 2 – Financial Performance 7
Part 3 – Detailed Business Review 15
Emerging Markets 16
Emerging Markets data tables (Rand) 19
Nedbank 23
Nedbank data tables (Rand) 27
Old Mutual Wealth 29
Old Mutual Wealth data tables (Sterling) 32
Institutional Asset Management 34
Non-core business – Bermuda 36
Part 4 – Financial Information 39
EMERGING MARKETS
Highlights H1 2014 H1 2013 % change
AOP (IFRS basis, pre-tax) (Rm)(1) 5,198 4,250 22%
NCCF (Rbn) 9.2 11.1 (17)%
FUM (Rbn)(2) 876.5 840.8 4%
Pre-tax FUM operating margin(3) 121bps 114bps 6%
(1) From 1 January 2014, all Property & Casualty business has been reported as part of Emerging Markets. Comparatives have been restated
(2) Comparative information for FUM is presented as at 31 December 2013 and has been restated to include Property & Casualty FUM of R2.9 billion
(3) Pre-tax FUM operating margin is calculated as pre-tax AOP on an annualised basis divided by average FUM and has been restated to include Property &
Casualty
Operating environment
The Emerging Markets business performed well despite the continued economic slowdown across some of our primary markets.
Consumers in South Africa remain under financial strain, particularly in the lower and middle-income markets resulting in lower
affordability of Mass Foundation products and regular premium Affluent risk products.
Persistency in Mass Foundation is being proactively managed through various management actions. These actions are expected to
improve the ongoing persistency levels of the new business written, but have also resulted in a slowdown in regular premium sales over
H1 2014.
Property & Casualty market conditions continue to be tough, particularly in personal lines and specialist agriculture vehicles, and there
have been higher losses in the credit guarantee business. Commercial lines have enjoyed better conditions since the latter half of 2013.
West and East African economic growth continues to be strong, however financial conditions in Zimbabwe have deteriorated.
Business developments
In South Africa, we continue to invest in enhancing our product offering.
- We continue to expand the Wealth offering with the launch of an integrated private client stock broking and fiduciary capability
- A new savings product (2-in-ONE) aimed at our Retail Mass customers has been piloted and the full launch will be in Q3 2014
- Within our Corporate business, we have made significant progress to convert stand-alone schemes to umbrella, therefore
improving efficiencies. A new Superfund umbrella has been launched. Corporate is making excellent progress in preparing for
Retirement Fund Reform
- We have agreed terms to increase our share of Old Mutual Finance (OMF), a consumer credit business, from 50% to 75%.
The consideration is R1.1 billion and the transaction is expected to be completed in Q4 2014. A clear controlling shareholding
will further enhance our ability to leverage from the OMF branch network to provide an efficient distribution channel and
customer service platform for Mass Foundation.
In Rest of Africa, we are looking at various opportunities to expand our footprint, particularly in East and West Africa, through
acquisitions, organic growth and the launch of innovative products:
- Significantly increased the number of advisers in Ghana from 115 at the start of the year to 254 by June 2014.
Bancassurance agreements were signed with Ecobank in Ghana and all regulatory approvals have been obtained. We also
launched an enhanced funeral product in June
- In Kenya, the Regulator has granted Faulu a life product licence. We have expanded our retail mass distribution network,
which is starting to gain traction
- We are awaiting approval from the local Regulator in Nigeria for our retail savings products and intend to build an agency
channel in Nigeria to distribute these products. We are also expanding our relationship with Ecobank in Nigeria including the
distribution of Property & Casualty products through the bank's branches and have underwritten a Group Life scheme for
300,000 members of the Nigerian Armed Forces
- The contribution of gross sales from East and West Africa as a percentage of total Rest of Africa gross sales has increased to
19% in H1 2014 (H1 2013: 13%)
- Old Mutual and MTN Swaziland launched a pilot of a mobile insurance offering called Likhandlela
- A multi-media Old Mutual brand-building campaign commenced in Nigeria and in Kenya
- Old Mutual Namibia has launched a debit shopping card (OMCARD), which includes a cashback rewards programme.
In Latin America, we are leveraging our AIVA relationship and their significant distribution network to accelerate the sales of life products
in Mexico.
The integration of the SA Property & Casualty operations into the Emerging Markets business has started and we expect increased
synergies and collaboration to follow.
Efficiency in capital management at Property & Casualty has helped boost RoE.
We continue to support economic transformation in South Africa and the communities in which we operate and have invested R670
million in 2014 through our social responsible funds (Housing Fund, Schools Fund, IDEAS Renewables Energy Fund and the Agri
Fund). These investments made through our Smooth Bonus funds improve social infrastructure in South Africa, whilst delivering
excellent returns for the policyholder.
IFRS AOP results
Pre-tax AOP increased by 22% to R5,198 million, with strong growth in profits for South Africa Retail Affluent (up 24% to R1,901 million)
and Corporate (up 42% to R800 million) businesses. Mass Foundation profits grew 10% to R863 million.
In South Africa, profits increased by 26% benefiting from strong equity market performance and continued good mortality, as well as
improved disability experience. Movements in the South African FSV interest rate now have a negligible impact on South African profits
given the continued hedging programme.
OMIG profits were boosted by the continued growth in equity market levels and one-off gains in the Alternatives boutique.
Underlying operating profits in Rest of Africa (excluding LTIR and central expenses) decreased by 3%. This was mainly due to lower
banking profit, as risk management actions related to the delayed disbursement of loans adversely affected Central Africa Building
Society (CABS) interest income, and increased new business costs. LTIR in Rest of Africa increased by 25%, largely in Zimbabwe, due
to strong stock market performance in H2 2013 and favourable exchange rate movements.
In Asia & Latin America, profits grew by 24% due to good organic growth, higher profits from AIVA and as a result of the depreciation of
the Rand.
Underwriting losses in South Africa Property & Casualty narrowed significantly as premium rate rises began to take effect, claims
management improved and weather related losses reduced.
Total central expenses decreased by 7% mainly due to the non-recurrence of costs incurred in H1 2013, despite increased governance
infrastructure costs to support the expansion in Africa.
Net client cash flow
NCCF declined from R11.1 billion to R9.2 billion, mainly due to lower asset management net inflows in South Africa, Colombia and
Namibia. NCCF in South Africa increased from R4.7 billion to R4.8 billion with Retail Affluent benefiting from the launch of XtraMAX in
May 2013. The strong asset management inflows in 2013 at Futuregrowth were not repeated.
The new Wealth proposition in South Africa attracted NCCF of R3.1 billion in the first six months of 2014.
Funds under management
FUM increased by 4% to R876.5 billion as a result of the positive NCCF and continued strong performance in the equity markets.
At 30 June 2014, 22% of total start manager FUM originated from our emerging markets businesses outside of South Africa.
Gross sales
Gross sales increased by 13% to R85.8 billion. Strong growth in South Africa was achieved in the Retail Affluent business which grew
by 21%, largely due to single premium sales boosted by the Wealth offering and the launch of XtraMAX in May 2013. Mass Foundation
recorded growth of 13%, despite stricter acceptance processes as our 5.0 million in-force policies continue to generate strong premium
inflows. There were higher unit trust sales in Zimbabwe, Kenya and Malawi. In Asia we included sales from the Indian corporate
business for the first time.
Non-covered sales
Non-covered sales increased by 13% to R58.3 billion, with growth of 12% in unit trusts and 15% in other non-covered sales. A strong
single premium performance was delivered by Retail Affluent. Large mandates were secured in the OMIG Liability Driven Investments
(LDI) boutique. Strong asset management flows in Kenya and improved unit trust sales in Zimbabwe and Malawi contributed to a 25%
growth in sales in Rest of Africa. A significant corporate deal was secured in Colombia.
Covered sales
Life APE sales increased by 11% to R4.5 billion.
In South Africa single premium sales increased by 9% with strong growth of 38% in Retail Affluent mainly due to XtraMAX and higher
living annuity sales, but single premium Corporate sales decreased due to large annuity deals secured in the comparative period that
were not repeated. Regular premiums in Corporate increased significantly due to higher group assurance and Evergreen sales. Retail
Affluent regular premium sales were weaker where customer affordability and strong competition has adversely affected Greenlight
sales.
Mass Foundation sales were flat compared to a very strong comparative period, although Q2 2014 did show a strong growth of 15% on
Q1 2014. Increased adviser numbers, fewer working days than the prior year and a deliberate decision to transition advisers to use a
new electronic business submission process reduced productivity in the period. We will continue to roll out the new electronic
submission process to the broader adviser force in H2 2014 as we believe it will provide process efficiencies, increase productivity and
improve persistency once fully operational.
On a like-for-like basis, sales in Rest of Africa increased by 13%. Sales in East Africa have been progressing well with higher adviser
numbers in Retail Mass providing traction in this market. In West Africa, sales have been recorded for the first time in Ghana with strong
credit life sales via Ecobank and a full six months of trading in Nigeria. The reported sales for Rest of Africa saw a 6% decline in APE
sales, mainly due to the inclusion of minority interests in the comparative period and a particularly strong H1 2013 in Namibia.
Life APE sales in Asia & Latin America showed strong growth momentum, particularly in the Mexican affluent market with sales
increasing by 25%. Sales in India have benefited from the inclusion of corporate life business and a 9% improvement in sales manager
productivity. Asia & Latin America contribute 12% to total OMEM life APE sales.
Old Mutual Finance
Solid growth in the OMF business was achieved whilst maintaining strict acceptance criteria. The credit loss ratio continues to improve
as the book matures. OMF branches continue to provide an efficient distribution and customer service platform for Mass Foundation.
Value of new business and margins
VNB declined by 17% to R818 million with the PVNBP margin at 3.0%. Retail Affluent VNB was lower due to a changing mix towards
more savings and single premium products. Corporate VNB was boosted by strong sales growth and favourable product mix. Mass
Foundation VNB decreased mainly due to a change in product mix and higher new business strain. In Rest of Africa, there was a less
profitable product mix, particularly in Namibia as a large one-off Corporate sale (Absolute Secure Growth portfolio) in 2013 was not
repeated. VNB in Latin America was negative (compared to positive VNB in the comparative period) following a change in expense
allocation methodology which resulted in a larger allocation to acquisition rather than maintenance expenses.
Embedded value
Total MCEV earnings (post-tax) increased by 16% on prior year to R3,601 million benefiting from continued good investment returns in
addition to higher operating earnings. Operating earnings of R2,471 million were 23% higher driven by significantly better experience
variances and higher expected returns, partly offset by lower VNB and higher negative other operating variances.
Persistency experience has improved significantly due to the one-off persistency losses in Corporate in 2013 not recurring in 2014 and
less negative persistency variance in Mass Foundation following the assumption changes made in December 2013.
Return on Embedded Value (RoEV) improved from 9.1% to 10.2% mainly due to positive operating experience variances, partly offset
by lower VNB.
Outlook
Given the financial pressures on consumers in the low to middle income market and ongoing labour disputes in South Africa, we
continue to see slowing Mass Foundation APE sales growth. If economic activity slows further, sales trends in Retail Affluent may be
adversely affected. Nevertheless Corporate and Retail Affluent continue to perform well.
Following the agreement with our joint venture partners, we will consolidate OMF once the acquisition is completed.
Zimbabwean prospects are subdued, but elsewhere in Africa we see attractive opportunities to grow our business through both organic
and also inorganic activity.
We are following the latest developments around foreign direct investment in India and are in close discussions with our joint venture
partner around potential investment opportunities.
The Group continues to explore capital market opportunities in the South African debt markets.
We remain focused on delivering against initiatives that address remediation in the core Property & Casualty business. Our current
pricing remediation initiatives have delivered positive results to date with attrition lower than expected.
Good progress has been made in laying the foundation for further collaboration across the Group.
We continue to look for appropriate investment opportunities in the rest of Africa in line with our African expansion strategy.
Emerging Markets data tables (Rand)
Adjusted operating profit (pre-tax)
By cluster: Rm
H1 2014 H1 2013 % change
Retail Affluent 1,901 1,528 24%
Mass Foundation 863 783 10%
Corporate 800 563 42%
OMIG 541 477 13%
Property & Casualty(1) (75) (140) (46)%
South Africa LTIR(1) 837 824 2%
Total South Africa 4,867 4,035 21%
Rest of Africa(1) 357 367 (3)%
Rest of Africa LTIR(1) 246 197 25%
Rest of Africa 603 564 7%
Asia & Latin America 210 170 24%
Central expenses(2) (482) (519) (7)%
Total Emerging Markets(3) 5,198 4,250 22%
By line of business: Rm
H1 2014 H1 2013 % change
Life and Savings 3,694 3,028 22%
Asset Management 1,218 989 23%
Banking and Lending(4) 100 98 2%
Property & Casualty(1) 186 135 38%
Total Emerging Markets(3) 5,198 4,250 22%
(1) Property & Casualty AOP including LTIR of R238 million, has been allocated according to geographic location. Comparatives have been restated
(2) Includes central and administration expenses incurred in South Africa of R346 million and Rest of Africa of R136 million
(3) Comparatives have been restated to include Property & Casualty AOP
(4) Comprises of Faulu Kenya and Central Africa Building Society in Zimbabwe
Gross sales and funds under management(1)
Market and Rbn
FUM other FUM
1-Jan-14 Gross sales(2) Redemptions Net flows movements(3) 30-Jun-14
Retail Affluent(4) 99.8 29.5 (26.5) 3.0 11.4 114.2
Mass Foundation(5) - 4.2 (1.9) 2.3 (2.3) -
Corporate(4) 51.9 12.2 (12.9) (0.7) 7.0 58.2
OMIG(5) 506.9 14.6 (14.4) 0.2 2.4 509.5
Property & Casualty 2.9 - - - (0.7) 2.2
Total South Africa 661.5 60.5 (55.7) 4.8 17.8 684.1
Rest of Africa(7) 53.9 6.5 (5.6) 0.9 2.8 57.6
Asia & Latin America 125.4 18.7 (15.2) 3.5 5.9 134.8
Total Emerging Markets 840.8 85.8 (76.5) 9.2 26.5 876.5
Market and Rbn
FUM other FUM
1-Jan-13 Gross sales(2) Redemptions Net flows movements(2) 30-Jun-13
Retail Affluent(4) 76.6 24.4 (22.6) 1.8 9.1 87.5
Mass Foundation(5) - 3.7 (1.7) 2.0 (2.0) -
Corporate(4) 45.9 12.2 (12.8) (0.6) 0.8 46.1
OMIG(5) 463.3 13.8 (12.3) 1.5 4.2 469.0
Property & Casualty(6) 2.8 - - - - 2.8
Total South Africa 588.6 54.1 (49.4) 4.7 12.1 605.4
Rest of Africa 38.4 5.5 (4.1) 1.4 7.4 47.2
Asia & Latin America 100.4 16.6 (11.6) 5.0 9.6 115.0
Total Emerging Markets 727.4 76.2 65.1 11.1 29.1 767.6
(1) FUM shown on an end manager basis
(2) Gross sales are cash inflows for the period and therefore include prior period regular premium flows
(3) Includes the foreign exchange impact of translating FUM managed outside of South Africa
(4) From 1 January 2014, Acsis and Symmetry institutional businesses are reported within Corporate, whereas previously these had been reported in the
Retail Affluent cluster. Comparatives have been restated (H1 2013: R2.2 billion Gross sales, R(0.4) billion NCCF and R44.8 billion FUM)
(5) Mass Foundation gross sales are recorded by segment but all FUM is managed by OMIG
(6) Opening FUM at 1 January 2014 restated to include Property & Casualty FUM of R2.9 billion (1 January 2013: R2.8 billion)
(7) From 1 January 2014 Property & Casualty FUM has been allocated by geographic location (R0.7 billion reclassification of P&C Africa FUM included in
'Market and other movements'). Comparatives have not been restated
Covered sales (APE)
Single premium APE Regular premium APE Total APE Rm
H1 H1 % H1 H1 % H1 H1 %
By cluster 2014 2013 change 2014 2013 change 2014 2013 change
Retail Affluent(1) 605 437 38% 662 722 (8)% 1,267 1,159 9%
Mass Foundation(2) 1 1 - 1,363 1,358 - 1,364 1,359 -
Corporate(1) 539 610 (12)% 487 150 225% 1,026 760 35%
Total South Africa 1,145 1,048 9% 2,512 2,230 13% 3,657 3,278 12%
Rest of Africa(3) 62 90 (31)% 284 278 2% 346 368 (6)%
Asia & Latin America(4) 194 213 (9)% 347 234 48% 541 447 21%
Total Emerging Markets 1,401 1,351 4% 3,143 2,742 15% 4,544 4,093 11%
Single premium APE Regular premium APE Total APE Rm
By product: H1 H1 % H1 H1 % H1 H1 %
2014 2013 change 2014 2013 change 2014 2013 change
Savings 1,166 848 38% 1,626 1,397 16% 2,792 2,245 24%
Protection(2) - - - 1,517 1,345 13% 1,517 1,345 13%
Annuity 235 503 (53)% - - - 235 503 (53)%
Total Emerging Markets 1,401 1,351 4% 3,143 2,742 15% 4,544 4,093 11%
(1) From H1 2014, Symmetry institutional business is reported within Corporate, whereas previously this had been reported in the Retail Affluent cluster.
Comparatives have been restated (H1 2013: R83 million single premium APE)
(2) OMF credit life sales are included within Mass Foundation protection sales (R105 million in H1 2014 and R102 million in H1 2013)
(3) For FY 2013, Rest of Africa life APE sales are reported net of minority interest whereas previously these were reported gross of minority interest with
the full impact for FY 2013 being booked in Q4 2013. From 1 January 2014 Rest of Africa also excludes renewal sales (FY 2013: R55 million).
Comparatives have not been restated. Rest of Africa life APE sales (net of minority interest and excluding renewals) would have been R305 million in H1
2013
(4) Asia & Latin America represents Mexico and a proportional share of India and China. India corporate business sales are only reported from 1 January
2014 (H1 2014: R87 million). Comparatives have not been restated
Non-covered sales
Rm
Unit trust / mutual fund
sales Other non-covered sales Total non-covered sales
H1 H1 % H1 H1 % H1 H1 %
2014 2013 change 2014 2013 change 2014 2013 change
South Africa (1)(2) 15,737 14,709 7% 22,505 19,958 13% 38,242 34,667 10%
Rest of Africa 2,732 2,438 12% 1,405 875 61% 4,137 3,313 25%
Asia & Latin America (3)(4) 15,908 13,653 17% - - - 15,908 13,653 17%
Total Emerging Markets 34,377 30,800 12% 23,910 20,833 15% 58,287 51,633 13%
(1) Within South African Retail Affluent, Old Mutual Investment Services recognises Linked Investment Service Provider (LISP) sales on which it earns
fees irrespective of where the underlying funds are managed. Where these funds are managed by Old Mutual Unit Trusts (OMUT), OMUT also
recognises a sale. These intra-segment sales for H1 2014 amount to R4.6 billion (H1 2013: R5.1 billion)
(2) Old Mutual International life sales amounting to R2.5 billion are 44% above prior year and are not included in the OMEM non-life sales as these sales
are reported in Old Mutual Wealth (UK)
(3) AIVA sales amounting to R1.3 billion are 43% above prior year and are not included in the OMEM non-life sales as these sales are reported in Old
Mutual Wealth (UK)
(4) Represents Colombia and Mexico
Value of new business
Rm
H1 2014 H1 2013
Retail Affluent (1) 163 193
Mass Foundation 422 568
Corporate (1) 161 55
Total South Africa 746 816
Rest of Africa (2) 86 129
Asia & Latin America (3)(4) (14) 37
Total Emerging Markets 818 982
(1) From 1 January 2014, Symmetry institutional business is recorded within Corporate, previously this was recorded within Retail Affluent. Comparatives
have been restated (HY 2013: R5 million)
(2) For FY 2013, VNB is recorded for all countries in Rest of Africa. Comparatives have not been restated and only reflect Namibia
(3) No VNB is calculated in respect of Life APE sales in India and China
(4) Latin America is Mexico only
Old Mutual customer numbers: (millions)
H1 2014 FY 2013 % change
Retail Affluent 2.04 2.05 (0)%
Mass Foundation 2.70 2.58 5%
Corporate 1.57 1.54 2%
Total South Africa (1) 5.72 5.60 2%
Rest of Africa 2.76 1.91 45%
Asia & Latin America (2) 0.51 0.48 6%
Total Emerging Markets 8.99 7.98 13%
(1) The sum of the segment volumes will not equal total volumes due to customer overlap across South Africa
(2) This does not include the number of customers in India
Old Mutual Finance
Rm
H1 2014 H1 2013 % change
Lending book (gross) 8,939 7,340 22%
Provisions for impairments 19.8% 17.8% 200bps
Sales: loans advanced 3,085 3,056 1%
Covered sales (APE) of insurance sold in branches (excluding credit life) 228 209 9%
Credit life sales 105 102 3%
NPAT/average lending book (1) 3.9% 2.6% 130bps
IFRS AOP (pre-tax) 343 219 57%
Loan approval rate 34.0% 33.6% 40bps
Credit losses: average lending book 14.0% 15.2% (120)bps
Return on equity 32.2% 25.8% 640bps
Branches 239 213 12%
Staff 2,206 1,948 13%
(1) Net profit after tax (NPAT)/average lending book is stated after capital charges
Property & Casualty
Rm
H1 2014 H1 2013 % change
Gross written premiums 6,112 5,442 12%
South Africa 5,401 5,076 6%
Rest of Africa (1) 711 366 94%
Net earned premiums 4,781 4,359 10%
Underwriting result (47) (118) 60%
South Africa (75) (140) 46%
Rest of Africa (1) 28 22 27%
Underwriting margin (1.0)% (2.7)%
South Africa (1.7)% (3.4)%
Rest of Africa (1) 6.7% 9.3%
Claims ratio (2) 72.0% 73.9%
Combined ratio 101.0% 102.7%
International solvency ratio 49.0% 56.3%
Return on equity 8.7% 4.1%
(1) The results of Nigeria and Zimbabwe are included for the first time in H1 2014. Comparatives have not been restated
(2) Includes claims administration costs transferred from management expenses
NEDBANK
Rm
Highlights H1 2014 H1 2013 % change
AOP (IFRS basis, pre-tax) 6,438 5,489 17%
Headline earnings 4,599 3,914 18%
Net interest income 11,263 10,309 9%
Non-interest revenue 9,480 9,535 (1)%
Net interest margin 3.55% 3.58%
Credit loss ratio 0.83% 1.31%
Efficiency ratio 56.5% 54.2%
Return on Equity 15.1% 14.6%
Return on Equity (excluding goodwill) 16.5% 16.1%
Basel III common equity tier 1 ratio 12.1% 11.8%
The full text of Nedbank's results for the six months ended 30 June 2014, released on 5 August 2014, can be accessed on our website
http://www.oldmutual.com/ir/news/viewNews.jsp?newsId=24525. The following is an edited extract:
Operating environment
Globally economic conditions in many developed countries improved in the second quarter of the year, with monetary policy remaining
generally accommodative. In contrast, conditions in most emerging markets deteriorated as concerns about fiscal and current account
deficits increased.
Local economic conditions worsened as the strike in the platinum mining industry, the longest in SA history, impacted confidence and
undermined production and spending. As a result, in the first quarter GDP contracted 0.6%, contributing to Standard & Poor's
downgrade of the country's investment grade sovereign risk rating by one-notch to ‘BBB-' and Fitch Ratings revising the outlook from
stable to negative.
The slowdown in household credit demand continued in the first half of 2014, with industry levels of growth in personal loans, motor
finance and transactional banking activity all declining, although the demand for residential mortgage finance continued to recover
slowly.
In the wholesale sector the level of growth in loans to companies strengthened as export opportunities started to improve, merger
activity increased and the rollout of renewable-energy infrastructure continued. The increase could be adversely impacted in the second
half of the year by the new wave of strikes that have spread to other sectors.
Business developments
During the period Nedbank concluded the transaction to acquire an initial 36.4% shareholding (with a pathway to control) of Banco
Unico in Mozambique. This has strengthened Nedbank's franchise and client proposition in the Southern African Development
Community (SADC) and East Africa. In West and Central Africa our alliance with Ecobank continues to deliver value for Nedbank. We
have until 25 November to make a decision on our subscription rights to take up a 20% shareholding in ETI.
In addition, our alliance with Bank of China has progressed and since June 2013 we have jointly concluded a number of deals together
in the rest of Africa.
Review of results
Headline earnings grew 17.5% to R4,599 million (H1 2013: R3,914 million) for the six months ended 30 June 2014, driven by good net
interest income (NII) growth and a substantial improvement in impairments.
Diluted headline earnings per share (HEPS) increased 16.1% to 965 cents (H1 2013: 831 cents) and diluted earnings per share
increased 16.3% to 965 cents (H1 2013: 830 cents).
Nedbank generated economic profit (EP) of R833 million, up 11.2% (H1 2013: R749 million), notwithstanding an increased cost of
equity of 13.5% (H1 2013: 13.0%). The return on average ordinary shareholders' equity (RoE), excluding goodwill, increased to 16.5%
(H1 2013: 16.1%) and the RoE to 15.1% (H1 2013: 14.6%), driven by higher return on assets (RoA) to 1.22% (H1 2013: 1.15%).
Nedbank remains well capitalised, with the Basel III common-equity tier 1 (CET1) ratio at 12.1% (December 2013: 12.5%). Funding and
liquidity levels remained sound, with statutory liquid assets and cash reserves, including the surplus liquid-asset buffer of R26.4 billion
(December 2013: R28.0 billion), increasing to R70.1 billion in June 2014 (December 2013: R69.7 billion) in preparation for the Basel III
liquidity coverage ratio (LCR) transition period, which will come into effect on 1 January 2015.
The net asset value per share continued to increase, growing 7.0% (annualised) to 13,596 cents from 13,143 cents in December 2013.
Cluster performance
Our competitive client-facing franchises provide a well-diversified earnings base and delivered an increased RoE of 19.6% (H1 2013:
17.6%) and headline earnings growth of 22.0%.
Nedbank Capital's growth in earnings and RoE was driven by strong NII growth and improvements in impairments mainly through
recoveries on accounts that have been fully provided for. Pre-provisioning operating profit growth was 6.6%.
The solid earnings growth in Nedbank Corporate was underpinned by continued growth in commercial mortgage and corporate
advances, and in core transactional income. Impairments improved further as a result of good risk management across the portfolio
while expenses continue to be well managed. Fair-value adjustments had a negative impact as, excluding fair-value adjustments,
headline earnings grew 25.2% to R1,173 million (H1 2013: R937 million).
Nedbank Business Banking reported a strong increase in headline earnings and RoE following the normalisation of impairments from a
large single-client default in the comparative period. Pre-provisioning operating profit was up 6.5%. Sustained momentum in new-client
acquisition and retention, aided by keeping transactional fees at 2013 levels and frontline effectiveness, contributed to quality-advances
payouts and good growth in liabilities and current account creditors. This is notwithstanding the protracted challenges facing the small-
and medium-enterprise sector in SA.
Headline earnings in Nedbank Retail reflect the benefits of charting a new strategic growth path in 2010 to reposition the franchise
sustainably while ensuring excellent risk management. Selective advances origination strategies at higher margins, particularly in home
loans and personal loans, together with proactive risk mitigation in prior periods, led to the credit loss ratio (CLR) improving to the lower
end of the cluster's target range but also muted NIR growth. The strengthening of our transactional banking franchise continues as we
consistently invest in our ‘branch of the future' concept, maintaining our transactional banking fees at 2013 levels, bringing to market a
lower-priced credit life product with improved benefits, and increasing our levels of marketing spend. Operating income has grown by
12% with pre-provisioning operating profit decreasing by 6.6%.
Growth in Nedbank Wealth's headline earnings was driven by strong earnings growth in Wealth Management and Asset Management,
offset by a slowdown in retail volumes, lower credit life pricing and higher weather-related short-term insurance claims.
Headline earnings at the Centre include, among others, fair-value movements in the hedged portfolios that were negative and portfolio
impairment provisions for ongoing uncertainty of R225 million (H1 2013: R140 million). The prior period included R88 million of reversals
in insurance provisions that were not repeated.
Detailed segmental information is available in the results booklet and on the Nedbank website at www.nedbankgroup.co.za under the
'Financial information' section.
Financial performance
Net interest income (NII)
NII grew 9.3% to R11,263 million (H1 2013: R10,309 million), supported by growth in average interest-earning banking assets of 10.2%.
The net interest margin (NIM) narrowed to 3.55% (H1 2013: 3.58%) as the benefit of increased endowment income from the interest
rate increase in January was offset by asset and liability margin compression. The asset margin compression was due to advances mix
changes mainly relating to lower-margin wholesale assets growing faster than retail assets, in particular higher-margin personal loans,
and pricing pressure experienced in the motor finance and corporate property finance businesses. Liability margin compression arose
from higher levels of competition for Basel III-friendly deposits.
Impairments
Impairments decreased 29.8% to R2,333 million (H1 2013: R3,325 million) and the CLR improved to 0.83% (H1 2013: 1.31%),
comprising a specific charge of 0.78% and a portfolio charge of 0.05% (H1 2013: specific: 1.24% and portfolio: 0.07%).
CLRs across all the clusters were either close to, or better than, the lower end of their respective through-the-cycle target ranges. A
strong risk management and collections focus resulted in improved impairments across Nedbank. Our collections processes generated
post write-off recoveries of R422 million (H1 2013: R412 million), including personal-loan recoveries of R153 million (H1 2013: R130
million).
The CLR also benefited from the mix change in assets, as personal loans, which attract a higher level of impairments, now account for a
smaller proportion of the overall advances categories. This was further supported by the lower CLR in Nedbank Capital, Corporate,
Business Banking and Wealth.
Total Nedbank defaulted advances decreased by 13.7% to R17,409 million (H1 2013: R20,176 million), with ongoing improvements in
the residential mortgage and personal-loans books, partly offset by an increase in MFC (vehicle finance).
The coverage ratio for total and specific impairments increased to 65.9% (H1 2013: 58.8%) and 42.7% (H1 2013: 40.9%) respectively.
Portfolio coverage on the performing book was maintained at 0.7% (H1 2013: 0.7%).
Non-interest revenue (NIR)
Non-interest revenue (NIR) decreased to R9,480 million (H1 2013: R9,535 million) as a result of fair-value movements together with the
outcomes of our strategic choices, the base effect of specific once-off items in the 2013 comparative period and a general slowdown in
client transactional activity in the challenging consumer environment. Excluding movements in fair value, NIR increased 0.8%.
In line with our commitment to sustainable banking practices, our strategic decision to slow down personal-loan growth, reduce the
pricing of our credit life product with improved benefits, and maintain transactional fees at 2013 levels was the main driver of lower
growth in commission and fee income of 2.9% to R6,970 million (H1 2013: R6,771 million) and insurance income decreasing 3.5% to
R917 million (H1 2013: R950 million). Insurance income was further impacted by the increase in weather-related short-term insurance
claims and a slowdown in insurance sales in line with low growth in the retail advances environment.
Growth in trading income was 1.3% to R1,293 million (H1 2013: R1,276 million) off the high 2013 base. Private-equity income increased
to R145 million (H1 2013: R59 million), following strong performance in Nedbank Capital private equity and mark-to-market revaluations
of unlisted investments. Sundry income was 52.6% lower at R173 million (H1 2013: R365 million) as the comparative period included
the central insurance provision releases referred to above.
Expenses
Expenses grew 8.9% to R11,712 million (H1 2013: R10,750 million), reflecting consistent investment in the bank's franchise, including
the reformatting of the retail branches, innovation to deliver efficiencies and optimise systems, and increased marketing spend.
The underlying drivers include:
- Staff-related costs increasing 9.6%, consisting of:
- 7.1% growth in remuneration and other staff costs;
- the short-term incentive increasing 24.5%, mostly due to timing and a lower level of accrual in the first half of 2013, and
- the long-term incentive increasing 13.7%;
- Computer processing and marketing costs up 17.0% and 14.5% respectively.
Taxation
Nedbank's effective tax rate was maintained at 25.4% (H1 2013: 25.9%).
Statement of financial position
Capital
Nedbank remains well capitalised, with all capital adequacy ratios well above the Basel III minimum regulatory capital requirements and
within Nedbank's Basel III internal target ranges. The CET1 ratio of 12.1% increased from 11.8% at June 2013, but decreased from
12.5% at December 2013 despite strong organic earnings growth due to relatively higher risk-weighted assets. The increase was mostly
due to an updated personal-loan loss-given-default model, higher market risk arising from market volatility over the half-year-end and
other assets, mainly sundry debtors, which will revert to normalised levels.
Our tier 1 and total capital ratios decreased slightly relative to our ratios at December 2013 due to the grandfathering of old-style Basel II
additional tier 1 and tier 2 instruments increasing from 10% to 20% in line with Basel III transitional requirements and the redemption of
R1.7 billion of old-style Basel II tier 2 instruments in February 2014. To align with Nedbank's capital plan and Basel III transitional
requirements, we issued R2.2 billion of Basel III-compliant tier 2 debt instruments in April 2014.
Further detail on risk and capital management will be available in the 'Risk and Balance Sheet Management review' section of
Nedbank's analyst booklet and the Pillar 3 Report to be published on the website at nedbankgroup.co.za in September 2014.
Funding and liquidity
Our balance sheet remains well funded with a sound profile. In line with industry trends and market expectations of higher interest rates,
the average long-term funding ratio for the second quarter moderated to 24.9% (average fourth quarter 2013: 26.2%). Nedbank
successfully issued R4.3 billion in senior unsecured debt in the period, with tenors ranging between 3 and 10 years, and grew Nedbank
Retail Savings Bonds by R1.1 billion, with the issued amount now totalling R10.7 billion.
Nedbank maintained a strong liquidity position supported by a large portfolio of sources of quick liquidity and low interbank and foreign
currency funding reliance.
Statutory liquid assets and cash reserves, including the surplus liquid-asset portfolio of R26.4 billion (December 2013: R28.0 billion),
increased to R70.1 billion in June 2014 (December 2013: R69.7 billion). Further increases in high-quality liquid assets are planned for
the second half of 2014 ahead of the Basel III liquidity coverage ratio (LCR) transition period, which will see the minimum LCR
requirement increase from a starting point of 60% in January 2015 to 100% by January 2019. Overall Nedbank is well positioned to
exceed the minimum LCR requirements within the transition period.
Loans and advances
Loans and advances grew 10.0% (annualised) to R608.2 billion (December 2013: R579.3 billion), underpinned by gross new payouts in
banking advances of R86.1 billion (June 2013: R83.0 billion).
Nedbank Capital's banking advances, although up 17.4% on June 2013 due to the successful conversion of assets in the second half of
2013, decreased in the six months to June 2014 as a result of some large repayments in early 2014. Growth in trading advances, the
more volatile component of the advances book, was driven by foreign-currency placements and deposits placed under reverse
repurchase agreements.
Advances growth in Nedbank Corporate was primarily driven by commercial mortgages increasing 20.5% (annualised) from drawdowns
in deals concluded in prior periods, and term loans in Corporate Banking growing 12.3% (annualised).
Nedbank Business Banking's advances growth was supported by sustained levels of asset payouts and good client acquisitions, offset
by slower drawdowns and early settlements.
Retail banking advances growth was led by the portfolio tilt strategy of selective origination resulting in personal loans and home loans
decreasing 17.8% and 0.9% respectively, and an increase in Card and MFC of 17.1% and 8.2% respectively.
Advances movements at the Centre primarily reflect increased business activity in the Rest of Africa Division.
Deposits
Deposits grew 9.6% (annualised) to R631.7 billion (December 2013: R603.0 billion) and the loan-to-deposit ratio was maintained at
96.3% (June 2013: 96.3%).
Call and term deposits and fixed deposits grew strongly at 15.7% and 15.0% respectively, with excellent contributions from Nedbank
Capital, Corporate and Business Banking. Current accounts increased 7.8%, with steady growth from across all the clusters, and
savings accounts grew 14.4%, driven by strong growth in Nedbank Wealth.
Overall the underlying momentum was favourable, with good growth in term funding categories and a significant decrease of higher-cost
funding categories such as negotiable certificates of deposit that decreased 36.3%.
Economic outlook
In contrast to the improving global economic environment, SA's economy is expected to remain under pressure, although the
strengthening international environment and weak rand should support moderate recovery off a low base in the second half of the year.
Nedbank has revised its 2014 growth forecast for GDP downwards to 1.8% from 2.6% at the beginning of the year. Downside risk
remains high as economic recovery will be affected by the extent of continued industrial action.
The operating environment for the banking industry is expected to remain difficult, characterised by low levels of retail credit demand,
relatively subdued transactional activity and increased risk of bad debts. In addition, interest rates are currently expected to increase by
a further 25 bps this year, resulting in a cumulative increase of 100 bps by the end of 2014. Further sovereign rating downgrades would
lead to additional tightening of the monetary policy. This is likely to place further pressure on consumers and overall growth rates.
Prospects
Our updated guidance on financial performance for the full year is as follows:
- Advances to grow at mid-to-upper single digits
- NIM to be slightly below the 2013 level of 3.57%
- CLR to improve from the 2013 level, to below the mid-point of the through-the-cycle target range of 80 to 120 bps
- NIR (excluding fair-value adjustments) to grow at low-to-mid single digits
- Expenses to increase by mid-to-upper single digits
Our financial guidance for organic growth in diluted HEPS in 2014 to be greater than nominal GDP growth remains unchanged as
communicated at the 2013 annual results presentation.
Nedbank data tables (Rand)
Cluster performance
Headline earnings (Rm) RoE (%)
H1 2014 H1 2013 % change H1 2014 H1 2013
Nedbank Capital 1,053 801 31% 31.6% 28.4%
Nedbank Corporate 1,159 1,069 8% 22.8% 25.9%
Nedbank Business Banking 512 349 47% 19.5% 15.2%
Nedbank Retail 1,319 1,054 25% 12.5% 10.0%
Nedbank Wealth 464 421 10% 33.9% 35.9%
Operating units 4,507 3,694 22% 19.6% 17.6%
Centre 92 220 (58)%
Total 4,599 3,914 18% 15.1% 14.6%
Credit loss ratio analysis
(%)
H1 2014 H1 2013 FY 2013
Specific impairments 0.78 1.24 0.97
Portfolio impairments 0.05 0.07 0.09
Total credit loss ratio 0.83 1.31 1.06
Credit loss ratio (%)
Through-the-
% banking cycle target
advances H1 2014 H1 2013 FY 2013 ranges
Nedbank Capital 12.6 (0.04) 0.77 0.51 0.10 – 0.55
Nedbank Corporate 32.9 0.22 0.30 0.23 0.20 – 0.35
Nedbank Business Banking 11.5 0.44 1.02 0.65 0.55 – 0.75
Nedbank Retail 36.3 1.90 2.56 2.16 1.90 – 2.60
Nedbank Wealth 4.1 0.21 0.24 0.28 0.20 – 0.40
Total 0.83 1.31 1.06 0.80 – 1.20
Capital (%)
Internal target
30-Jun-14 ratio 30-Jun-13 ratio range Regulatory
(Basel III) (Basel III) (Basel III) minimum (1)
Common equity Tier 1 ratio 12.1 11.8 10.5-12.5 5.5
Tier 1 ratio 13.1 13.0 11.5-13.0 7.0
Total capital ratio 15.0 14.8 14.0-15.0 10.0
Ratios calculated include unappropriated profits
(1) The Basel III regulatory requirements are being phased in between 2013 and 2019, and exclude the Pillar 2b add-on
Loans and advances by cluster
Rm
% change
30-Jun-14 31-Dec-13 (annualised)
Banking activity 70,304 72,066 (4.9)%
Trading activity 44,728 37,483 39.0%
Nedbank Capital 115,032 109,549 10.1%
Nedbank Corporate 192,234 175,274 19.5%
Nedbank Business Banking 63,732 62,785 3.0%
Nedbank Retail 196,830 195,435 1.4%
Nedbank Wealth 24,597 22,082 23.0%
Other 15,785 14,247 21.8%
Total 608,210 579,372 10.0%
OLD MUTUAL WEALTH
Highlights H1 2014 H1 2013 % change
AOP (IFRS basis, pre-tax) (GBPm) 120 108 11%
NCCF (GBPbn) 1.2 0.8 50%
FUM (GBPbn) (1) 80.3 78.5 2%
Pre-tax revenue operating margin (2) 40% 36% 400bps
(1) Comparative information for FUM is presented as at 31 December 2013
(2) Pre-tax revenue operating margin is calculated as pre-tax AOP divided by net revenue
Operating environment
UK retail investment markets were generally strong in the period. The European markets were strong in the period but confidence has
not improved, with considerable concern over continued low economic growth. Despite UK equity markets being relatively flat, we have
experienced strong flows this year. Equity asset classes remain more attractive than bond markets in an ongoing low interest rate
environment. Within the equity market, we are seeing some sector rotation out of the UK and into the Far East and emerging markets.
The regulatory environment continued to favour our business model with further liberalisation of UK pensions. The increased flexibility
and changes in the charging basis of the UK platform market have resulted in higher levels of registration and re-registration of non-
insurance wrapped business.
Sterling continued to strengthen against the US Dollar and Euro, reducing fund values and revenues in Sterling terms for funds
denominated in those currencies. This is most relevant for our International business and European operations in the first half of 2014.
Business developments
We have made significant progress in our strategy of developing into a vertically-integrated wealth and asset management business
over the first half of the year.
During the period, we completed the sale of Skandia Poland to Vienna Insurance Group. We also announced the sale of the German
and Austrian businesses to Heidelberger Leben Group, which we expect to complete in the second half of 2014, for an aggregated
consideration of €220 million with an associated write down in intangible assets and goodwill of GBP125 million. We announced that we
would acquire Intrinsic, a large UK distribution business with 3,000 advisers. This transaction completed in July 2014. Our UK Platform
and protection products and some of the OMGI fund range have been added to Intrinsic's product panels for its 840 restricted advisers.
We also announced our intention to acquire the remaining 50% stake in the Intrinsic Cirilium Investment Company Limited (ICICL) from
Henderson Global Investors, which we expect to complete in Q4 2014. Both of these acquisitions further enhance our integrated
customer proposition that encompasses advice, asset management, platform and products.
OMGI is now available on all major distribution platforms in the UK and its success over the past year was recognised at the 2014
Investment Week Fund Manager of the Year Awards, where it was awarded Global Group of the Year.
We launched WealthSelect in the UK and this is performing as expected. The majority of customers are investing in our Managed
Portfolio Service (MPS) offering and 83% are choosing an active investment portfolio. We continue to review the funds available to
enhance the proposition and offer financial advisers and customers access to the very best fund managers at a highly competitive price.
In our International business, we launched our new high net-worth product, Silk Life Plan, in Hong Kong and Singapore at the start of
July, which will be distributed via an important new partnership with Jardine Lloyd Thompson (JLT), one of the largest brokers in Asia.
The partnership is a significant milestone in our Asian strategy allowing us to offer our award-winning product and expertise to a broader
set of customers. With the additional capability that Wealth Interactive will provide once implemented within our International
businesses, we intend to increase our penetration in the markets we operate, delivering flexible and user friendly products on an
efficient platform.
We are continuing to progress with our outsourcing contract with IFDS which will boost product capability and lower our cost base from
2016.
The Old Mutual Wealth brand will appear on UK television for the first time in partnership with Sky Sports golf as well as on outdoor
advertising and a wide range of consumer and trade media as part of the renaming of the business. This will generate public awareness
of our new brand following the disposal of the Group's Nordic businesses.
IFRS AOP results
Old Mutual Wealth AOP increased by 11% to GBP120 million (H1 2013: GBP108 million) through strong growth in our asset
management and UK Platform businesses and a reducing expense base. Adverse foreign exchange movements against the US Dollar
and Euro reduced earnings by approximately GBP7 million compared with H1 2013.
OMGI delivered strong profits of GBP16 million, 100% higher than prior period (H1 2013: GBP8 million) with the operating margin
improving to 28% as funds under management rise. We have seen strong net inflows to our higher margin Alternatives and Equities
desks with some outflows from lower margin sub-advised funds.
UK Platform had significant growth with profits up to GBP10 million from GBP2 million at H1 2013 reflecting higher FUM and increased
gross inflows over 2014. We continue to seek operational efficiencies to manage the cost base and ensure our platform remains highly
competitive.
Profits from our International business reduced by 26% to GBP23 million (H1 2013: GBP31 million), with exchange movements reducing
fund values and fee income by GBP5 million, whilst the cost base is largely in Sterling.
Europe Open book increased profits to GBP14 million, 27% higher than prior period (H1 2013: GBP11 million) on the back of higher
average FUM and increased efficiencies in Italy.
Our Heritage business maintained its profitability in line with prior year (H1 2013: GBP53 million) despite the reduction in FUM as the
book runs off. Expenses have reduced as we focus resources on our core growth markets.
Net client cash flow (NCCF)
NCCF of GBP1.2 billion was 50% higher than prior period (H1 2013: GBP0.8 billion) with strong sales in OMGI and UK Platform.
OMGI NCCF of GBP1.1 billion was significantly higher than prior year (H1 2013: GBP0.2 billion) driven by strong performance via UK
third party sales. Outflows via UK third party institutional channels occurred in the second quarter, including the loss of a GBP248 million
segregated mandate and a further GBP153 million outflow from our divested Nordic business (H1 2013: GBP782 million). These were
largely low margin mandates.
UK Platform delivered NCCF of GBP0.9 billion, 31% lower than prior year (H1 2013: GBP1.3 billion). Outflows have been higher in 2014
for ISAs and collective investment accounts. We saw outflows of GBP89 million from a single broker due to a change in their proposition
to a more discretionary approach and their preference for an extended range of investment vehicles.
International NCCF of GBP80 million was 68% lower than prior year (H1 2013: GBP254 million). Outflows were 20% higher, in part due
to a single large policy which surrendered in the second quarter of the year.
Within our Europe Open business, NCCF of GBP207 million was 43% below prior year (H1 2013: GBP364 million). Sales were 12%
lower than prior year primarily due to strong sales in Italy in the first half of 2013 and management actions. Surrenders were 14% higher
due to two large policies in the first quarter of the year.
NCCF in our Heritage businesses had a net outflow of GBP513 million, which was 14% better than the prior year reflecting the
continued success of the retention strategies in place throughout the business. Surrender rates reduced to 9.1% from 11.2% for the
same period last year.
Funds under management
Funds under management rose to GBP80.3 billion, due to market gains and positive NCCF. Exchange rate movements reduced the
growth to 2%.
UK Platform assets were GBP28.8 billion, up 5% since the start of the year (December 2013: GBP27.3 billion). OMGI FUM was
GBP17.0 billion, up 6% on the start of the year (December 2013: GBP16.0 billion). Investment performance was good, with 47% of
OMGI core funds in the first quartile over a three year period and a total of 64% of funds above the median. Global strategic bond and
small/mid cap fund performance was weaker given active conviction on future interest rate movements and stock picking respectively.
Gross sales
Gross sales increased by 15% compared to the prior period to GBP7.7 billion (H1 2013: GBP6.7 billion) driven by strong performance in
OMGI and the UK Platform.
OMGI gross sales of GBP4.5 billion were 29% higher than prior year (H1 2013: GBP3.5 billion) driven by strong sales performance
through UK third parties and improving sales penetration from UK Platform. We saw strong flows into our Alternative investment desk
with sales four times higher than last year. Our Global Equity Absolute Return fund performed particularly well and has generated sales
of GBP608 million. Sales in the UK equity asset classes were 90% higher than prior year driven by strong flows into UK Alpha. Our
multi-asset Spectrum fund range delivered GBP348 million of sales in the year and WealthSelect has net new sales of GBP160 million
at H1 2014, with a further GBP65 million in July 2014.
UK Platform sales of GBP2.5 billion were 11% above prior year (H1 2013: GBP2.3 billion) with all products delivering higher sales. ISA
sales were particularly impressive and were 16% up on prior year. Our personal pension sales were 7% higher than prior year. Platform
flows into OMGI from both new business and internal transfers were GBP775 million over H1 2014, representing 31% of total platform
sales (H1 2013: 15%, FY 2013: 16%). The increase over prior periods is in part due to existing Platform funds transferring into our
WealthSelect proposition.
International cross-border sales of GBP892 million were 4% lower than prior year (H1 2013: GBP931 million). Sales in the UK, Latin
America and South Africa were all higher than the same period last year. The Far East has seen lower sales so far this year, but has
improved over the second quarter as sales in Hong Kong recovered.
Within our Europe Open business, sales in Italy of GBP521 million were 17% below the prior year largely as a result of specific
management actions to manage new business strain and exceptional sales in 2013 (H1 2013: GBP625 million). In France, we started
the year strongly and despite a challenging second quarter, year to date sales of GBP150 million were 6% above prior year (H1 2013:
GBP142 million).
Heritage top-ups on existing business were down 10% from prior year to GBP351 million, as the closed books of business run off and
new flows move to more recent product types.
Outlook
Our penetration of sales through UK Platform into OMGI is expected to continue the trend seen in the first half of the year. In H2 2014
we expect OMGI third party sales in the UK to continue to perform well, building on the strong start to the year, supported by growing
sales of WealthSelect. We expect to see the sector rotation out of UK small/mid cap into Global, Asian and Global Emerging Market
asset classes continue throughout H2, supporting our strategy to grow our breadth of asset capabilities. We expect continued
development of our asset management capabilities, in particular through our offshore distribution strategy and the inclusion of Cirilium.
We are progressing well with the integration of Intrinsic into Old Mutual Wealth following completion of the acquisition on 1 July 2014.
Integration costs are expected to be incurred in the second half of the year. The addition of our UK Platform and protect products to the
Intrinsic restricted advice panel is expected to support NCCF from the third quarter. Nevertheless, we have a cautious outlook for the
second half of the year as we anticipate continued re-registrations within our UK Platform business and further losses of low margin
administrative mandates in our UK Other business. We expect modest growth of sales in our International business notwithstanding the
launch of our Silk Life Plan.
The first half-results include the profits arising from our businesses in Poland, which has been sold, Germany and Austria, the sales of
which we expect to complete in the second half of 2014. The profit target for Old Mutual Wealth of GBP300m by 2015 included a
contribution from these businesses. As they have now been sold, the target for Old Mutual Wealth has been adjusted and is now
GBP270 million.
Old Mutual Wealth data tables (Sterling)
Adjusted operating profit
GBPm
H1 2014 H1 2013 % change
Invest & Grow markets
UK Platform 10 2 400%
UK Other (1) 4 3 33%
International 23 31 (26)%
Old Mutual Global Investors 16 8 100%
Total Invest & Grow 53 44 20%
Manage for Value markets
Europe - Open book (2) 14 11 27%
Heritage business (3) 53 53 -
Total Manage for Value 67 64 5%
Total Old Mutual Wealth 120 108 11%
(1) Includes Protection, Series 6 pensions and UK Institutional business
(2) Includes business written in France, Italy and Poland
(3) Includes UK Heritage and Europe Heritage (Germany, Austria, Switzerland and Liechtenstein)
Gross sales and funds under management
GBPbn
Market and
FUM other FUM
1-Jan-14 Gross sales Redemptions Net flows movements 30-Jun-14
Invest & Grow markets
UK Platform (1) 27.3 2.5 (1.6) 0.9 0.6 28.8
UK Other (2) 5.6 0.3 (0.3) - - 5.6
International 15.0 0.9 (0.8) 0.1 - 15.1
Old Mutual Global Investors (3)(4)(5) 16.0 4.5 (3.4) 1.1 (0.1) 17.0
Total Invest & Grow 63.9 8.2 (6.1) 2.1 0.5 66.5
Manage for Value markets
Europe - Open book (6) 6.6 0.7 (0.5) 0.2 (0.4) 6.4
Heritage business (7) 15.4 0.4 (1.0) (0.6) 0.4 15.2
Total Manage for Value 22.0 1.1 (1.5) (0.4) - 21.6
Elimination of intra-Group assets (4)(8) (7.4) (1.6) 1.1 (0.5) 0.1 (7.8)
Total Old Mutual Wealth 78.5 7.7 (6.5) 1.2 0.6 80.3
GBPbn
Market and
FUM other FUM
1-Jan-13 Gross sales Redemptions Net flows movements 30-Jun-13
Invest & Grow markets
UK Platform (1) 22.6 2.3 (1.0) 1.3 1.1 25.0
UK Other (2) 4.7 0.4 (0.4) - 0.5 5.2
International 13.9 0.9 (0.6) 0.3 0.5 14.7
Old Mutual Global Investors (3)(4)(5) 13.8 3.5 (3.3) 0.2 0.8 14.8
Total Invest & Grow 55.0 7.1 (5.3) 1.8 2.9 59.7
Manage for Value markets
Europe - Open book (6) 5.9 0.8 (0.4) 0.4 0.1 6.4
Heritage business (7) 14.3 0.4 (1.1) (0.7) 2.0 15.6
Total Manage for Value 20.2 1.2 (1.5) (0.3) 2.1 22.0
Elimination of intra-Group assets (4)(8) (6.0) (1.6) 0.9 (0.7) 0.2 (6.5)
Total Old Mutual Wealth 69.2 6.7 (5.9) 0.8 5.2 75.2
(1) UK Platform FUM excludes intra-Group assets from our International business of GBP1.5 billion at 30 June 2014 (30 June 2013: GBP1.5 billion)
(2) Includes Protection, Series 6 pensions and UK Institutional business
(3) OMGI redemptions include Nordic sale-related net outflow of GBP153 million in H1 2014 (H1 2013: GBP782 million)
(4) OMGI and intra-Group eliminations include gross inflows from the Heritage business of GBP0.3 billion (H1 2013: GBP1.0 billion)
(5) OMGI FUM includes GBP0.1 billion of shareholder assets (H1 2013: GBP0.1 billion)
(6) Includes business written in France, Italy and Poland
(7) Includes UK Heritage and Europe Heritage (Germany, Austria, Switzerland and Liechtenstein)
(8) Assets and flows managed by OMGI on behalf of other Old Mutual Wealth businesses
INSTITUTIONAL ASSET MANAGEMENT
Consisting of US Based Affiliates and Other Institutional. Further information is included in the Financial Disclosure
Supplement.
H1 2013
Highlights H1 2014 Reported % change
AOP (IFRS basis, pre-tax) ($m) 91 84 8%
Operating margin, before non-controlling interests 33% 33%
Operating margin, after non-controlling interests 28% 29%
Net client cash flow ($bn) (1.3) 10.6 (112)%
Funds under management ($bn) (1) 273.0 257.4 6%
(1) Comparative information for FUM is presented as at 31 December 2013
Overview
Institutional Asset Management experienced growth in both AOP and FUM during the period, benefiting from positive markets and
continued strong long-term investment performance. Net client cash flows were volatile but improved during the second half of the
period.
IFRS AOP of $91 million was up 8% on the H1 2013 reported result, while FUM grew 6% from 31 December 2013.
Business developments
In June 2014, the line management of Rogge Global Partners, the segment's UK-based global fixed income manager, changed to report
directly to Old Mutual plc; however the transition has no impact on Rogge's investment process, client service, or day to day
management of the firm.
Also in June 2014, the Group announced the filing of a registration statement for its proposed minority IPO of Old Mutual Asset
Management (OMAM), a newly formed holding company for the Group's US based institutional asset management business.
IFRS AOP results and operating margin (1)
Revenues of $329 million for the period were 12% higher than H1 2013 ($294 million), driven by higher average FUM.
IFRS AOP of $91 million increased by 8% (H1 2013: $84 million).
AOP margin remained the same as the comparative period at 33% before non-controlling interests, but was down marginally to 28%
after non-controlling interests due to the changes in the mix of profits between affiliates.
Investment performance (2)
US Based Affiliates' aggregate investment performance is reported as weighted by the revenue generated by its products. As of 30
June 2014, assets representing 70%, 73%, and 75% of revenue outperformed benchmarks over the one-, three- and five-year periods
(31 March 2014: 77%, 93%, and 68%). On an asset weighted basis, over the one-, three- and five-year periods ended 30 June 2014,
57%, 62% and 61% of assets outperformed benchmarks, compared to 84%, 94% and 55% at 31 March 2014.
The decline in one- and three-year performance from 31 March 2014 was primarily driven by one strategy underperforming its
respective benchmark.
Continued strong long-term investment performance and improved distribution capabilities remain key to generating future positive cash
flows. We consistently monitor capacity in our investment strategies and products with the aim of generating alpha for our clients.
Rogge's investment performance has improved during the course of the half year.
(1) H1 2013 reported results include Echo Point which was discontinued in Q4 2013
(2) Investment performance results exclude Rogge which was transferred to Old Mutual plc in Q2 2014
Funds under management and net client cash flows
$bn
H1 2014 H1 2013 (1)
Opening FUM 257.4 208.6
Gross inflows 16.5 22.5
Gross outflows (16.9) (11.3)
Total client driven net flows (0.4) 11.2
Hard asset disposals (0.9) (0.6)
Net client cash flow (1.3) 10.6
Disposals (0.4) -
Market and other 17.3 10.6
Closing FUM 273.0 229.8
(1) H1 2013 reported results include Echo Point which was discontinued in Q4 2013
FUM increased by $15.6 billion or 6% to $273.0 billion (31 December 2013: $257.4 billion) driven by $17.3 billion of market appreciation,
partially offset by $1.3 billion of net client cash outflows. FUM consists primarily of long-term investment products diversified across
equities (61.8%), fixed income (25.3%) and alternative investments (12.9%).
Net client cash outflows were largely concentrated in global fixed income strategies, as investors generally favoured equity products
during the period. Despite the NCCF outcome for the half year, net client cash flows during the period are expected to result in a $8.5
million positive impact to annualised revenue due to the concentration of our inflows in higher fee products relative to our outflows.
Gross inflows totalled $16.5 billion (H1 2013: $22.5 billion), with flows driven by US mid cap value equities, global low/managed volatility
equities, international equities, global value equities and emerging markets equities. These inflows included $6.0 billion from new client
accounts.
Gross outflows including hard asset disposals totalled $17.8 billion (H1 2013: $11.9 billion), concentrated in US large cap value and
international equities and global fixed income. The $0.9 billion of investment-driven hard asset disposals relate to Heitman, Institutional
Asset Management's real estate manager.
Non-US clients currently account for 35% of FUM (31 December 2013: 36%). International equity, emerging markets, global equity,
global fixed income and currency products account for 52% of year-end FUM (31 December 2013: 52%).
Institutional Asset Management's Global Distribution initiative raised $3.5 billion in total assets which were funded in H1 2014.
Outlook
The industry is experiencing a period of heightened volatility in NCCF. Recent strong equity market performance, as well as the impact
on bond markets of continued low interest rates, is resulting in asset reallocation decisions by trustees and changes in
recommendations by their investment consultants. Likewise, as is normal in a period of management transition such as the one
currently occurring at Rogge, there is a higher probability of volatility in inflows and outflows. Rogge's 2014 AOP result is expected to
be approximately break-even.
The business remains focused on developing capabilities in international equities and further penetration of non-US markets, including
through its Global Distribution initiative. It continues to pursue other growth initiatives, including collaborative investments in affiliate
growth, as well as strategic partnerships with high-quality boutique asset management firms with complementary investment products.
NON-CORE BUSINESS – BERMUDA
Old Mutual Bermuda is in run-off and closed to new business, consequently it is treated as non-core business; its results are excluded
from the Group's IFRS AOP, although the interest on inter-company loan notes from Bermuda to Group Head Office is charged against
the AOP of the core business of the Group.
Overview and operating environment
Bermuda has continued to implement its run-off strategy of risk reduction while managing for value. In July 2014, the Bermuda Monetary
Authority (BMA) agreed to the release of $160 million of capital through the cancellation of inter-company loan notes, reflecting the
reduction in size of the remaining liabilities, risk management strategies and de-risking actions taken.
Surrender development
The development of the Bermuda policyholder account values is shown below:
$m
30-Jun-14 31-Dec-13 % change
Account Value: GMAB 930 1,031 (10)%
Account Value: Non-GMAB 356 407 (13)%
Total Account Value 1,286 1,438 (11)%
The value of surrenders in H1 2014 was $181 million (H1 2013: $895 million), which represented approximately 13% of opening assets
under management (H1 2013: 33%). The decrease in surrender experience for H1 2014 is as expected, and primarily attributable to the
higher surrender rates experienced during the fifth year anniversary top-up period for the Universal Guarantee Option (UGO)
Guaranteed Minimum Accumulation Benefit (GMAB) policies. This top-up period ended in H1 2013. Policy count in 2014 is considerably
below that of 2013.
Business developments
Due to the significantly reduced book size and the resultant reduction in market risk exposure, a dynamic tail hedging strategy was
implemented in May 2014, hedging the GMAB liability against adverse equity and forex markets and replacing the existing 50% dynamic
hedging strategy. The objective of the dynamic tail hedging strategy is to protect the company from catastrophic market losses
amounting to more than 40% of the 120% guarantee value. The main benefit of the change will be to reduce initial and variation margin
costs of the hedge and conserve short-term liquidity. Although some increased volatility of earnings is expected, the required capital is
comparable with the 50% dynamic hedging strategy.
IFRS results
The IFRS post-tax profit for the period was $23 million (H1 2013: $3 million profit) mainly due to the $22 million favourable guarantee
performance net of hedging. GMAB reserves have reduced by $28 million over the period.
Total insurance liabilities
Insurance liabilities at 30 June 2014 were $1,342 million (H1 2013: $1,809 million); these included:
- $1,128 million (H1 2013: $1,379 million) was held in separate accounts relating to variable annuity investments, of which $930
million was related to GMAB policies (H1 2013: $1,164 million)
- $56 million (H1 2013: $138 million) related to the variable annuity guarantee reserve on the GMAB policies
- $158 million (H1 2013: $292 million) related to other policyholder liabilities. These included deferred and fixed indexed annuity
businesses as well as variable annuity fixed credited interest investments.
Reserve development
The movement in guarantee reserves over the last year is shown below. All fifth anniversary top-up payments were completed by the
end of August 2013:
$m
30-Jun-14 31-Dec-13 30-Jun-13
Guarantee reserves: UGO GMAB (1) 53 79 128
Guarantee reserves: CGO GMAB (2) 3 5 10
Total 56 84 138
(1) Universal Guaranteed Option (UGO) Guaranteed Minimum Accumulation Benefit (GMAB)
(2) Capital Guarantee Option (CGO) Guaranteed Minimum Accumulation Benefit (GMAB)
The majority of the variable annuity guarantee reserve relates to contracts with UGO GMABs. The UGO GMAB reserve was $53 million,
a decrease of $26 million year to date, mainly due to improved overall equity market levels and higher levels of UGO GMAB surrenders
at 30 June 2014, than those assumed for reserving purposes.
The UGO GMAB reserve relates to the full remaining period of the relevant policies, including the 10-year 120% top-up of total
premiums and any contracts with a Highest Anniversary Value (HAV) feature.
At 30 June 2014, circa 86% of the UGO GMAB book on a guarantee amount basis had a HAV feature, which gives customers a 10-year
guarantee value based on the highest policy value at any anniversary date. As at 30 June 2014, circa 13% (account value $98 million)
of the total UGO GMAB book had a 10-year guarantee above 120%.
At 30 June 2014, the Hong Kong policies constituted 84% of the remaining UGO GMAB reserve on a HAV spread liability basis. A 5-
year hedge was purchased in Q2 2013 for the 10-year risk associated with the HAV feature of the Hong Kong policies which could
potentially arise in 2017-18. This hedge (HAV Options) provides protection against markets rising above the 120% guarantee and
subsequently falling, and is expected to reduce future volatility of earnings and capital requirements emanating from the HAV.
The CGO GMAB reserve relates to the remaining period of the 7-year (107%) and the 10-year (110%) respective top-ups and does not
include a HAV feature.
Treasury management of Bermuda assets
The Bermuda business assets backing the liabilities include:
$m
30-Jun-14 31-Dec-13 % change
Cash and other liquid assets 50 71 (30)%
Treasury Portfolio 61 62 (2)%
Fixed Income general account portfolio 4 5 (20)%
Collateral for hedge assets & FV of equity options 19 32 (41)%
Inter-company loan notes 454 466 (3)%
Investment in affiliated subsidiary (Group seed investments) 260 260 0%
Separate Account assets 1,128 1,234 (9)%
Other assets 18 27 (33)%
Total Assets 1,994 2,157 (8)%
The inter-company loan notes are structured in tranches allowing capital and treasury management flexibility, when cash is required
from this source. Additional cash funding may also be required to provide for increases in fixed surrenders, margin collateral due to the
dynamic tail hedging activity depending on market movements, changes in hedging strategy and implementation of strategic initiatives
to allow Old Mutual to exit Bermuda upon completion of the top-ups in 2018.
Part 3 – Detailed Business Review
Capital and surplus
Statutory capital increased to $627 million at 30 June 2014 (31 December 2013: $604 million), reflecting the $23 million profit earned in
the first half of the year. Capital allocated to the business on a local level takes into account the inter-company loan notes from the
business to the Group.
In July 2014, the BMA approved a $160 million capital release in the form of a cancellation of inter-company loan notes from the
business to the Group. The capital and liquidity needs of the business will be kept under review as the run-off continues.
Strategy and outlook
Old Mutual Bermuda will continue to implement its run-off strategy of minimising risk while managing for value.
Sponsor
Merrill Lynch South Africa (Pty) Ltd
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